The S&P 500 (SPX) dropped 0.41% and the broader Russell 3000 (RUA) dropped 0.45% yesterday, July 26, 2011. Of the 4,600 stocks that were tracked, 26 stocks trading above $1 at the close on July 25 fell by more than 10% yesterday. 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:
Buy Patriot Coal Corp. (PCX): PCX is a leading coal exploration and production company in the Eastern United States, with mining operations in Appalachia and the Illinois Basin. Its customers include electric utilities, industrial users and metallurgical coal customers. Its shares traded down 13.9% on Tuesday, and are up 8.6% year-to-date (YTD). PCX shares fell on Tuesday, due to the company missing consensus estimates in the June quarter, reporting $632 million in revenue and a 14 cents loss for the June quarter versus analyst estimates of $604 million and 7 cents profit. Per CEO Mark Schroeder, “A number of factors impacted our costs this quarter, including new mines coming online, higher sales-related costs, and the idling of the Panther longwall for about two weeks."
The company trades at a forward 7 P/E, while earnings are projected to explode from a 53 cents loss in 2010 to 70 cents earnings in 2011, to $2.92 in earnings in 2012. While shares may weaken and remain range-bound in the interim due to the poor June quarter report, we believe that we may be approaching an attractive buy point for long-term investors. We believe that coal, especially metallurgical coal, is at the beginning stages of a multi-year bull market, fueled by worldwide demand (especially from China and India) for steel. PCX is aggressively adding to its high-margin net coal capacity, projecting to add more than 37% capacity over the next couple of years, which will fuel margins and profits in the long-term. We would buy here in stages, to take advantage of any further weakness in the share price as the stock moves lower fishing for a bottom.
Buy Paccar Inc. (PCAR): PCAR designs, manufactures, and distributes light-, medium-, and heavy-duty trucks and related aftermarket parts primarily in the United States and Europe. It is the third largest manufacturer of heavy-duty trucks in the world after Volvo and Daimler, and markets its heavy-duty diesel trucks under the Kenworth, Peterbilt, and DAF nameplates. The company sells its products for use in over-the-road and off-highway hauling of freight, petroleum, wood products, construction, and other materials. Its shares dropped 10.7% yesterday, and are down 21.5% YTD. PCAR shares fell Tuesday, as the company reported 65 cents earnings for the June quarter, 3 cents short of analyst estimates of 68 cents, while revenue came in higher at $3.7 billion versus estimates of $3.58 billion.
PCAR trades at a forward 12 P/E, in the top one-third of its historic P/E range, while earnings are projected to explode from $1.24 in 2010, to $3.81 in 2012, at a 75% compounded growth rate. The earnings shortfall in the current quarter was on account of parts shortages that held down production volume and drove up costs. We believe that with the P/E at a fraction of the projected earnings growth rate, shares are priced attractively for a buy point based on a P/E to growth (PEG) basis. We would be buyers here, buying in stages to take advantage of any further weakness in the shares. It seems that analysts would agree with us as they give it a mean target of $59, with a high of $67, well above the current $45 price; and of the 20 analysts that cover the company, 7 rate it buy/strong buy and 13 rate it at hold.
AK Steel Holding Corp. (AKS): AKS manufactures flat-rolled carbon, stainless, electrical steel and tubular products for the automotive, appliance, construction and manufacturing industries. Its shares traded lower by 17.5% on Tuesday, and they are down 21.7% year-to-date.
AKS shares fell on Tuesday, reacting to a disappointing June quarter in which it reported $1.79 billion in revenue and 30 cents in earnings, well short of the analyst estimates of $1.81 billion and 50 cents. The company met shipment and average selling price (ASP) targets for the quarter, but raw material prices rose higher than anticipated leading to a decrease in operating profit to $46 per ton versus previous company estimates of $65 per ton. Looking forward, the company expects a further squeeze in operating profit to $15 per ton for the September 2011 quarter, due to a 1% reduction in ASP and a further increase in raw material prices. This calculates to approximately 13 cents per share in earnings for the September quarter, well short of current analyst estimates of 34 cents per share. However, despite the steep deterioration in fundamentals, AKS shares are not priced to sell/short based on where we are in the economic cycle. Shares are more likely to remain range-bound between $11/$12 and $14/$15, and we would just stay clear of AKS here.
Buy Rediff.com India Ltd. Adr (REDF): REDF is an Indian provider of internet content, communications and information services via Rediff.com. Its website consists of interest specific channels relevant to Indian interests including cricket and movies, community features including e-mail and chat, and e-commerce offerings. The company also offers broadband and wireless content to users who have access to these services. The stock was down 12.5% yesterday, and it is up 84.9% YTD. REDF was down on account of a disappointing June quarter report yesterday before the market open, in which the company reported a higher loss of 8 cents versus 4cents in the prior year, but at par with the 8 cents loss reported in the prior quarter. Revenue dropped off to $5.4 million from $5.6 million in the prior quarter, but was up from $5.2 million last year.
REDF, and its Indian peer Sify Technologies Ads (SIFY) are both incurring losses every quarter, and both are up approximately three-fold to five-fold in the last twelve months, while revenue is up 5% to 7% for SIFY and in the mid-teens for REDF. No analysts cover either company, and none of the high alpha or guru funds has a position in either stock. Both stocks are up strongly this year based on excitement about India expanding its broadband coverage and also an explosion in online content and services in India, both of which would be tremendous positives for both companies. For example, the Indian Telecom Commission recently approved the National Optical Fiber Optical Network proposal valued at $4.4 billion as part of the National Broadband plan that aims for 160 million broadband connections by 2014. This along with the recent launch of 3G services by private telecom operators in India bodes well for internet content and communications services provider REDF and SIFY. The shares of REDF are down almost 50% from the record high in April, while the fundamental growth story is still the same. We would look at the current weakness as a buying opportunity, and would be cautious buyers here, buying a small initial position and adding to it on any further weakness.
Seven Arts Pictures Plc (SAPX): SAPX is a U.K.-based independent motion picture production and distribution company engaged in the development, acquisition, financing, production, and licensing of theatrical motion pictures for exhibition in domestic (i.e. the United States and Canada) and foreign theatrical markets, and for subsequent worldwide release in other forms of media, including home video and pay and free television. The company’s shares were down 25.8% yesterday, and they are down 34.1% YTD.
The 25.8% down move yesterday was just a partial reversal of the 235.1% up move on Monday that we wrote about earlier. The move was based on an announcement mid-day Monday of an agreement with Prodigy Pictures to jointly produce and distribute the motion picture “Neuromancer” based on the best-selling science fiction novel by William Gibson. The agreement is for Prodigy to finance the $60 million budget for “Neuromancer.” We had indicated in our previous comments that the shares had over-reacted here to the financing news, and that we would not be buyers here. We stand by that recommendation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.