The S&P 500 (SPX) dropped 0.56% and the broader Russell 3000 (RUA) dropped 0.66% yesterday, July 25th, 2011. Of the 4,600 stocks that were tracked, 20 stocks trading above $1 at the close July 25, rose more than 10% yesterday. These biggest gainers stocks were analyzed to determine if they would continue going up, or if they would reverse their moves going forward. The following are the best buy and sell ideas based on that analysis:
Buy Atrinsic Inc. (ATRN): ATRN, formerly New Motion Inc., operates via two principal business segments. One, the transactional services segment provides full-service online marketing and distribution services. Two, the subscription services segment offers the company’s portfolio of subscription-based content direct to consumers. This content includes digital music, casual games, sweepstakes and communities.
ATRN shares were up 43.9% yesterday based on speculation in a Seeking Alpha article over the weekend that shares are poised to triple. ATRN by virtue of its ownership of Kazaa, one of the original file-sharing networks, has on-demand licensing rights with the four major record labels, namely Sony Music Entertainment, EMI Group, Warner Music Group and Universal Music Group. These rights enable Kazaa to offer legitimate on-demand Internet music. Kazaa paid $100 million for these licensing rights in 2007, well above ATRN’s market-cap of just $32 million at the close yesterday. It is argued that these rights are worth much more, maybe to the tune of $1 billion, to a strategic buyer like Apple Inc. (AAPL), Amazon.com Inc. (AMZN) or Google Inc. (GOOG) that is seeking to establish or expand its leadership in Internet music. Indeed, ATRN could go it alone and still capture a sizable market in the evolving Internet music space that could be worth several times its current market-cap, as is the case with its peer Pandora Media Inc. (P) that offers personalized streaming music. The article linked above by Seeking Alpha contributor Mark Gomes explains this investment thesis in more detail.
However, it should be noted that there are significant execution risks associated with this strategy. For one, the company has only $1.6 million in cash available, and it is burning cash like it was 1999. In the last four quarters, it burned through almost $3 million per quarter, and if it decides to go it alone, it may need to burn through even more to compete with more established competitors like Pandora Media Inc. (P). This may necessitate an extreme dilutive event based on the low share price, and management may take advantage of the increased share price to announce the dilution. Furthermore, almost 0.6 million shares are shorted, which equals approximately 15% of the float.
The major distinctive feature about this story though for the ‘believers’ is that even with the meteoric rise yesterday, it may still be early in the game, and you have the opportunity to get in on the ground floor in advance of a multi-fold move in the share price as suggested in Gomes in his Seeking Alpha article. The stock is completely ignored by Wall Street investment research, as no analysts cover it, and no high alpha or guru funds own it. Indeed, institutions own only 4.4% of the shares or 8% of the float.
ATRN shares pulled back 24% from their intra-day highs after rising almost 100% during the morning session yesterday, and they closed at $4.69, giving back half of their peak intra-day gains. We believe that while it is difficult to make an investment case for ATRN after the strong gains yesterday, this may be a short-term trading opportunity for the not-so-risk-averse. We believe the major risk here is the announcement of a major dilutive event by the company to take advantage of the higher share price.
Buy Datalink Corp. (DTLK): DTLK is an information storage architect. The company provides data center solutions to Fortune 500 and mid-tier enterprises, helping them consolidate data storage on-site, migrate it off-site to virtual data centers, ensure data protection, and plan for business continuity and disaster recovery. DTLK shares were up strongly last Thursday after another blockbuster quarterly report in which the company trounced analyst estimates, reporting $89.5 million and 19 cents versus estimates of $82.7 million and 11 cents. Furthermore, it guided higher for the September quarter at $85-$90 million and 15 cents -19 cents versus estimates of $81.2 million and 13 cents.
BWOW shares were up 31% yesterday on the back of a 106% increase on Friday after Shenzhen Land Investment & Development Center signed a $0.4 million contract with BWOW to purchase a 50 ton marine hoist. The sale, although minor, represents an entry for BWOW into a new market that could lead to more sales of its customized marine hoist going forward. After a 232% increase to the intra-day high of $4.31 yesterday, we believe that shares are a bit ahead of themselves. Prior to this most recent news, the stock has traded only a few thousand shares a day, so we believe that BWOW shares could correct very steeply very quickly here, and we would stay out until more significant size sales can confirm the momentum of the company’s product sales in this market. Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.