Top Buy and Sell Ideas Based on Last Week's Biggest Losers (Part 1)

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Includes: FTNT, MTG, PMIR, RDN, RVBD, YRCW
by: GuruFundPicks

The S&P 500 ($SPX) rose 2.2% and the broader Russell 3000 ($RUA) rose 2.1% during the past week ending July 22nd, 2011; this almost completely reverses the 2.1% and 2.2% losses during the prior week. Of the 4,600 stocks that were tracked, 38 stocks trading above $1 at close on July 22nd fell more than 15% during the week. These biggest loser stocks were analyzed to determine if they would continue going down, or if they would reverse their moves going forward. The following are the best buy and sell ideas based on that analysis:

Sell YRC Worldwide Inc. (NASDAQ:YRCW): YRCW is an international provider of asset and non-asset based transportation services across the U.S., Puerto Rico, Canada, Guam and Mexico, via its brands iYellow Transportation, Roadway, Reimer Express, USF Holland, USF Reddaway, USF Glen Moore and New Penn. The stock dropped 21.4% during the past week; it is down 72.3% year-to-date (YTD) and down 99.33% from its 2009 highs less than two years ago.

The company has been flirting with bankruptcy for the last two-and-a-half years, and during that time the proverbial ‘sign on the wall’ has been there for all that have wanted to see it. It has been pretty obvious to all but the utterly faithful that the company was destined for either bankruptcy meaning a complete loss for equity holders, or some kind of a deal that would leave equity holders with a very small fraction of the company. The stock has mounted many tradable strong rallies during the last two years, but every rally has been an opportunity to sell. Sadly, we think that remains the case as even now after the recent restructuring and the steep drop in price, the stock remains expensive compared to its peers.

The recent restructuring deal dilutes existing shareholders leaving them with a paltry 2.5% equity control, with lenders getting 72.5% and the labor union getting 25% of the control. With an implied market cap post-restructuring of almost $2 billion and $1.3 billion in post-restructuring liabilities, the stock trades at an enterprise value (EV) of $3.3 billion which is 16 times its projected 2011 EBITDA of $210 million. In comparison, its peers Con-way Inc. (CNW) trades at 8.3 EV/EBITDA, Werner Enterprises Inc. (WERN) trades at 6.2 EV/EBITDA, JB Hunt Transport Services (JBHT) trades at 10.7 EV/EBITDA and Old Dominion Freight Line Inc. (ODFL) trades at 9.9 EV/EBITDA.

Furthermore, analysts seem to agree with our bearishness on this stock as they give it a mean price target of 25c, and a high of 50c, well below the current $1.03 price; and of the thirteen analysts that cover the company, four rate it at hold, five rate it at underperform, and four rate it sell. Furthermore, none of the 70+ guru funds have a position in this stock. We would look to selling the stock into any future rallies going forward.

Buy Riverbed Technology Inc. (RVBD): RVBD provides products and services that improve applications and accessibility of data over wide area networks (WANs). Its WAN optimization solutions liberate businesses from common IT constraints by increasing application performance, enabling consolidation, and providing enterprise-wide network and application visibility, all while eliminating the need to increase bandwidth, storage or servers. The stock was down 18.8% during the week and is down 8.7% YTD.

RVBD stock trades at a forward 27 P/E, still rich but well short of the projected 40% compounded growth in the earnings per share (EPS) projected from 59c reported in 2010 to $1.16 analyst estimates for 2012. The stock is down based on the not-so-stellar June 2011 quarter results reported last Tuesday after the market close. Earnings increased 62% year-over-year (YOY) to 21c meeting analyst EPS estimates, while revenue rose 35% to $170.3 million, slightly missing the $172.7 million estimate.

Furthermore, the shortfall was attributed to weakness in Europe which appears to be a short-term issue. Also, the company reported gross margins at all-time highs at 81.5% and record non-GAAP operating margins, for the June 2011 quarter. However, the stock driven up more than ten-fold by growth and momentum investors in the last two-and-a-half years was priced to perfection, and in the absence of a strong beat on top- and bottom-line numbers, traders drove the price down to the low-$30s where it closed last week.

We believe that the long-term story of RVBD is still intact, the company is expected to post strong top-line and bottom-line growth going forward, and the stock is under-valued as it trades at a discount to its growth and has a P/E to growth ratio (PEG) of well below 1.0. In the absence of any positive news, the stock is likely to continue drifting downward, and we would be buyers on a dip into the $28-$30 range.

It would seem that analysts agree with us as they too are bullish on the stock. They have a mean price target of $40, with a high of $48, well above the current $32 price; and of the 36 analysts that currently cover the stock, 21 rate it buy/strong buy and 15 rate it hold. Furthermore, the 70+ guru funds that we track cumulatively added a net $10 million to their prior $20 million position in the stock during the latest reported March quarter.

Sell Fortinet Inc. (NASDAQ:FTNT): FTNT develops unified threat management systems to provide security and networking functions through integrated circuits to enterprises, service providers and government entities worldwide. Its solutions are designed to integrate multiple levels of security protection, including firewall, virtual private networking, antivirus, intrusion prevention, web filtering, antispam and wide area network acceleration. The stock was down 21.5% during the week and is up 30.4% YTD.

FTNT, like RVBD, also reported earnings last Tuesday after the market close. It beat both analyst revenue and earnings estimates, and guided up September quarter revenue and earnings. The stock, however, traded down strongly by over 25%. This maybe because while earnings are up 80% year-over-year, they have flattened out over recent quarters, at 9c in September 2010, 11c in December 2010, 9c in March 2011, 9c in June 2011, and projected at 9c-10c for the September 2011 quarter.

FTNT trades at a trailing-twelve-month (TTM) P/E of 65 and a forward 50 P/E, at the top of its P/E range. Earnings, meanwhile, are projected to grow from 29c in 2010 to a projected 43c in 2012 at a compounded 22% growth rate, well below its P/E. We believe that the stock is not a good value here and would sell it on any rallies back above $22-24.

PMI Group Inc. (PMI), Radian Group Inc. (RDN) and MGIC Investment Corp. (MTG): All three companies are in the same business, offering private mortgage insurance for homeowners that put down less than 20% down payment when purchasing their homes. RDN in addition to that through its Financial Guaranty segment also insures and reinsures municipal bonds, structured finance transactions and other credit-based risks, as well as provides credit protection on various asset classes through financial guarantees and credit default swaps. PMI was down 18.9% during the week; it is down 68.8% YTD and down 98% from its all-time highs in 2007. RDN was down 18.5% during the week; it is down 59.0% YTD and is down 95% from its all-time highs in 2007. MTG was down 30.5% during the week; it is down 59.1% YTD and down 94% from its all-time highs in 2006.

All three companies have incurred huge losses since 2007 due to the housing crisis and the resulting homeowner defaults, as in the case of default they have to cover the insured value of the mortgage which generally varies from 20% to 50% and higher. In the current weak housing and macro-economic environment, it is difficult to make a bullish case for either company until we actually begin to see sustained strength in housing and a turn-around in the economy. Absent that, we are most likely going to continue to see an increase in housing defaults, which puts downward pressure on the prices of all three stocks.

Furthermore, there may be a tendency on the part of all three companies to issue stock on any price strength to improve their balance sheets, which will act as a lid to any upside price improvement in the stock. We would not be sellers here, but we also believe it is too early to buy here as the threat of bankruptcy or further dilution is real, and we would remain on the sidelines for now.

continue to part 2 >>>>

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.