The ugly budget fight on Capitol Hill took a toll on the markets last week. While the broader indices took a steep 4% dive, it is important to note that we are in the 30th month of the current rally and within 5% of the rally highs set just three months ago. As an investor, it is imperative to keep a cool head, especially in such turbulent times, and keep scouting for new opportunities while keeping an eye on both the price movements and news flow. Our daily and weekly coverage analyzing the top movers for top buy and sell ideas is aimed at enabling you in that effort. You can access the rest of our daily, weekly and quarterly mover series from our author page. This article covers our analysis of the top movers in the consumer goods and services sector last week.
The iShares Dow Jones U.S. Consumer Index Fund (IYC) was down 3.4% last week. Of the approximately 500 stocks in the consumer sector, 14 stocks trading above $1 at closing on Friday, July 29th, went down more than 15% during the week and another three went up more than 15% during the week (see Table). These 17 stocks were analyzed to determine if they would continue in the same direction, or if they would reverse their moves going forward. The following are the best buy and sell ideas based on that analysis.
GOL Linhas Aereas Inteligentes (GOL): GOL operates as a low-cost and low-fare passenger airline service to 59 destinations in Brazil, South America and select Caribbean destinations. It operates under GOL, VARIG, GOLLOG, VOE FACIL, and SMILES brand names. GOL fell 30.5% last week, most of it on Friday after cutting operating margin guidance from 6.5%-10% to 1%-4% for the fiscal year ending December 2011, and it is down 49.5% YTD.
GOL cited the rising costs of fuel, which accounted for 40 percent of the company’s total costs, and the hiring and training of 395 co-pilots to guarantee future expansion plans as the main reasons for the downward guidance. Also, it anticipates incurring additional charges from returning three Boeing 767 airplanes as it is ending charter flight operations. Furthermore, yields declined by around 7% in the first half of 2011 over the prior year as the Brazilian domestic market seat supply grew by a substantial 14.4%. However, probably most damaging in the guidance was that their market share fell from 40.8% to 37.5% for the first six months in 2011 compared to the prior year. While the company did not give specific earnings guidance, the EBIT guidance of 1%-4% translates to 30c annual earnings for 2011 versus current analyst estimates of 92c for 2011. That would explain the steep losses suffered by the stock on Friday, and we believe that near-term GOL may continue to trade weak due to reduced earnings projections and market share losses.
GOL has been an innovator in the Brazilian airline industry, igniting the demand for airline travel in South America into a steep upward trajectory in the past decade with its low-cost and low-fare approach to offering airline service. While shares at present levels do not scream buy, we believe there are also far too many positive developments coming online in the long-term that will boost share prices. Among them is Brazil holding the 2014 World Cup and the 2016 Olympics, both of which will not only increase revenue temporarily, but also the massive improvements in Brazilian air transportation infrastructure planned in advance of the games may provide a long-term stimulant for domestic air travel. So, in conclusion, we believe that while temporarily GOL is in for a hard landing due to near-term uncertainties, long-term it is poised to take-off strongly sometime in advance of the 2014 World Cup.
Buy IMAX Corp. (IMAX): IMAX manufactures projection and sound systems for giant-screens and 3-D images at theaters, museums, science centers and other entertainment sites, and they are also a producer and distributor of films for giant-screen theaters. The stock fell 33.7% last week, and it is down 32.5% YTD. IMAX shares started the slide on Monday, in advance of the earnings report that came out Thursday morning, after which the shares went into a free-fall. The company reported $57.2 million in revenue and 7c in earnings, well below consensus analyst estimates of $63.8 million and 19c. The company cited fewer blockbuster titles in the first six months of 2011 that are consistent with the IMAX brand, as the reason for the sharp miss in revenue and earnings, and indicated that their core long-term drivers of new theater installations and new theatre deals was strong, and that they are sitting on a record backlog of close to 300 IMAX® theatre systems.
IMAX is currently trading at a forward 12-13 P/E, at the bottom of its historic range. If you subscribe as we do to the view that the current quarter was an anomaly with fewer blockbuster titles consistent with the IMAX brand, and that the correct way to value the company is based on its performance on the core drivers of future business activity as in new theatre deals and new theatre installations, the stock is a compelling buy at these levels.
The IMAX story is probably still in the beginning to mid-innings as there currently only 518 theaters with IMAX® systems installed, and even at a modest growth rate in new theater installs, the company's revenues and earnings should continue to grow at high rates for the foreseeable future. The company has a record backlog; it is aggressively building new screens, and is expected to grow strongly in international markets. However, the stock is in free-fall, so we would buy small at first and add in stages to take advantage of any further weakness in price.
Analysts have a mean price target of $36, with a high of $42, well above the current $19 price; and of the 18 analysts that currently cover the company, 12 rate it at buy, four at hold and two at underperform/sell. Also, high alpha funds or guru funds that have a long-term track record of handily beating the markets are bullish on IMAX, adding to their holdings in the quarter and holding an out-sized 6.4% of the company in their portfolios.
Sell Royal Caribbean Cruises (RCL): RCL operates in cruise vacation industry in North America and internationally, and owns five cruise brands: Royal Caribbean, Celebrity Cruises, Azamara Club Cruises, Pullmantur Cruises and CDF Croisieres de France. Its shares were down 16.1% last week after reporting earnings on Wednesday after market-close, and they are down 34.9% YTD. The company reported $1.77 billion in revenue and 43c in earnings versus estimates of $1.8 billion and 43c, and it guided down to $3.05-$3.15 versus consensus estimates of $3.16 for fiscal year 2011 annual earnings. The stock trades at a forward 8 P/E, at the bottom of its historic trading range, while the earnings miss wasn’t that significant. We believe that the company’s announcement in its press release on identifying an error in their accounting may have been the primary reason behind the steep sell-off on Thursday and Friday. Furthermore, the company also faces weakness in its operations in the Eastern Mediterranean due to turmoil in the region tied in with the "Arab Spring." Given the earnings miss, the weakness in the Eastern Mediterranean and the accounting errors, we would stay clear of this stock for now.
Standard Pacific Corp. (SPF): SPF builds single-family attached and detached homes, condominiums and townhomes in seven states across the U.S. It constructs homes targeting a range of homebuyers primarily move-up buyers. The majority of its operations are in CA, and it also has presence in the metropolitan markets of FL, AZ, TX, SC, NC, CO and NV. The company, through its subsidiaries, provides mortgage loans to its homebuyers, as well as acts as a title insurance agent performing title examination services for Texas homebuyers. Its shares were down 20.6% last week, after the company issued a disappointing earnings report on Thursday after the market-close, and they are down 37.8% YTD.
SPF announced $204.2 million in revenue and a 3c loss, well short of consensus analyst estimates of $245.1 million and a 3c profit. SPF trades 93% below the $44 high it hit in 2007, but revenues too have dropped more than 70% from the peak, and the company operates at close to break-even versus profits in the $5 to $6 per share range during the peak. We believe that even at $3, there are significant under-performance risks. Furthermore, although some indicators have improved since the trough in 2008, we are still far from being out of the woods in the housing market. We would stay clear of this position for now.
Hovnanian Enterprises A (HOV): HOV builds single-family detached homes, attached townhomes and mid-rise and high-rise condominiums in 18 states across the U.S. The Company's homes are marketed and sold under the trade names K. Hovnanian Homes, Matzel & Mumford, Brighton Homes, Parkwood Builders, Town & Country Homes, Oster Homes and CraftBuilt Homes. Furthermore, as the developer of K. Hovnanian's Four Seasons communities, the Company is also one of the nation's largest builders of active adult homes. HOV shares were down 17.2% last week on no company-specific news, but on Tuesday’s news that sales of new U.S. homes unexpectedly fell for a second month and that a gauge of property values also dropped, indicating that the industry is still in recession.
Seven Arts Pictures Plc (OTC: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. SAPX was up 55.2% during the week, and it is down 58.8% YTD. The stock was up based on the 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 first covered SAPX when reviewing Monday’s big gainers, when the stock had closed the prior trading day at $4.49, and indicated that the stock had over-reacted to the upside, and was vulnerable to a correction. The stock has since fallen precipitously to $2.08 in just the next four trading days.
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
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.