Top Buy and Sell Ideas Based on Wednesday's Biggest Losers - Part 1

by: GuruFundPicks

The S&P 500 (NYSEARCA:SPY) dropped a steep 2.0%, and the broader Russell 3000 (NYSEARCA:IWV) dropped 2.2% on Wednesday, July 27th, 2011. Of the 4,600 stocks that were tracked, the top 25 losers that closed above $1 at market-close on July 27th fell 9.9% or more. 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 Juniper Networks Inc. (NYSE:JNPR): JNPR provides secure network infrastructure products and services that enable ISPs and telecommunications service providers to deploy services and applications, and meet the demands resulting from the rapid growth of the Internet. They offer next-generation Internet backbone routers that offer service providers increased reliability, performance, scalability, interoperability and flexibility, and reduced complexity and cost compared to current alternatives. Its shares traded down 20.9% on Wednesday, and they are down 33.2% year-to-date (YTD).

After shedding almost $3.5 billion from its market-cap, JNPR shares may look attractive at first glance, but don’t be fooled. The company faces a litany of problems, nay a perfect firestorm or a tsunami: (1) it missed both revenue and earnings estimates in the June quarter and guided lower on both revenue and earnings for the September quarter, (2) it faces a slower and highly uncertain IT spending environment as businesses are delaying spending due to the uncertain macro-economic outlook, (3) U.S. government agencies are butting budgets, including for IT spending, (4) Japan is still reeling from the aftermath of the March earthquake and tsunami, (5) competition is intensifying from industry stalwarts such as Cisco Systems Inc. (NASDAQ:CSCO) and Hewlett-Packard Co. (NYSE:HPQ), and (6) telecom service companies such as AT&T Inc. (NYSE:T) and Verizon Communications (NYSE:VZ) are expected to spend less on capital spending in the second half than they usually do.

JNPR shares meanwhile are trading at a trailing-twelve-month (TTM) price-to-earnings ratio (P/E) of 18, well above its bottom P/E in the 13 range. Meanwhile, the company has guided that revenue growth will decelerate to single-digits, and earnings will be lower year-over-year as well as sequentially, for the September 2011 quarter. The company has a legion of strong believers due to its strong market and technology leadership in the networking space, so shares are likely to rebound and try to close the gap from Wednesday’s trading at least half-way sometime in the next few days. We would take advantage of such a rally and sell into it as we believe that the outlook for JNPR is negative to uncertain over the near-term until some of the above mentioned problems are resolved positively. Until then, we would expect the stock to continue its march down towards the teens.

Avalon Rare Metals Inc. (NYSEMKT:AVL): AVL is a Canadian company engaged in the exploration and development of rare metals and minerals. Its primary asset is the Nechalacho Rare Earth Element Deposit located in the Northwest Territories, Canada. Its shares were down 10.4% on Wednesday, and they are up 9.1% YTD.

AVL shares were lower yesterday on account of the company filing to sell 7.1 million shares at $6.15 per share, a 7% dilution and also the pricing at $6.15 was 10% below Tuesday’s closing price. Furthermore, shares may also have reacted to a negative earnings report for the May quarter that was released by the company on Tuesday after the market closed. AVL reported an 8c loss, both missing street estimates of a 2c loss as well as being a negative outlier to their prior losses over the last two years that have stayed in a tight range between 1c and 3c.

Sell Illumina Inc. (NASDAQ:ILMN): ILMN develops integrated systems for the large-scale analysis of genetic variation and biological function. Its tools are designed to be used to provide information that could be used to improve drugs and therapies, customize diagnoses and treatment, and cure diseases. It derives product revenues from the sale of Microarrays and DNA Sequencing products, and it derives service and other revenues from genotyping and sequencing services as well as instrument maintenance contracts.

ILMN shares were down 17.7% on Wednesday, after the company announced that it beat both revenue and earnings estimates for the June quarter and guided higher for the fiscal year. Revenue increased 36% year-over-year and earnings were up 46% year-over-year, but the stock fell strongly, shedding over $1.5 billion from its market-cap. The culprit appears to be a decrease in gross margins by 170 basis points, and operating margins by 220 basis points year-over-year.

ILMN shares were priced for perfection, pricing in a much stronger beat than that announced by the company. Before the fall, just earlier this month, they traded just shy of $80 at a current 66 P/E on a TTM basis and at a forward 40 P/E, while earnings are projected to grow at a 36% compounded rate from $1.06 in 2010 to $1.96 in 2012. With the steep losses on Tuesday, ILMN still trades at a healthy forward 29 P/E, mid-range based on its historic P/E range, while earnings have flat-lined based on the company’s projection of $1.41-$1.44 for the 2011 fiscal year. It appears that growth investors may at least have temporarily exited the company after a nearly 80-fold increase in the last eight years from $1 in 2003, and the stock is not cheap enough to be attractive to value investors. Momentum is also to the downside so that any corrective rallies will most likely be sold. We would sell into any such corrective rallies in the mid-$60 range.

RXI Pharmaceuticals (NASDAQ:RXII): RXII develops proprietary therapeutics based on RNA interference to treat inflammatory and metabolic diseases and cancer. Its shares were down 10.4% on Wednesday on no new news, and they are down 48.1% YTD.
Ciena Corp. (NASDAQ:CIEN): CIEN is a designer of ethernet transport and switching systems used in network infrastructure by telecom and cable service providers. Its shares were down 10.8% on Wednesday in sympathy with JNPR’s 20% fall, as some of JNPR’s woes in terms of the weak economy, weak enterprise and government spending, and weak telecom spending is applicable to the entire industry, including CIEN.
Cardiome Pharma Corp. (NASDAQ:CRME): CRME develops cardiovascular drugs to treat atrial arrhythmias and improve cardiovascular function. Its shares traded down 10.2% on Wednesday, reversing 28.8% gains on Tuesday on news that Merck & Co. (NYSE:MRK) bought North American rights to the IV version of CRME’s Vernakalant from Astellas (OTCPK:ALPMF). This brings the entire Vernakalant portfolio under one roof, which could lead to higher synergistic sales once the IV version is approved. However, more importantly, it signals MRK’s confidence in the IV version that has had a checkered record with the FDA.
Active Power Inc. (NASDAQ:ACPW): ACPW manufactures flywheel-based uninterruptible power supply systems to generate short-term backup electricity. In addition, the company also provides the CleanSource DC, a battery-free replacement for lead-acid batteries used for bridging power; CoolAir products; and GenSTART, a battery-free starting modular system for customer’s diesel generator. Its shares were down 18.6% on Wednesday, and they are down 28.9% YTD. Its shares were down Wednesday on the heels of a disappointing June quarter report it announced on Tuesday after the market closed, that missed current June quarter analyst earnings estimates by a penny, but more importantly projected September revenue at $18-$21 million versus the $22.5 million analyst estimates. We believe that shares have over-reacted to the downside and should consolidate and base near Wednesday’s closing price of $1.75.

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