The S&P 500 ($SPX) rose 4.7%, and the broader Russell 3000 ($RUA) rose 5.1% on Tuesday, August 9th, 2011 as the Fed came to the rescue pledging that it would keep rates on hold at least through mid-2013. This welcome news tempered the fallout from the fiscal/budget/political crisis that had the market going into a tailspin over the prior two weeks on a revival of fears for a double-dip recession. While the markets are still in a downtrend as Tuesday’s surge only corrects 30% of the swoon over the prior two weeks, and it is natural to be fearful in such times, we believe that it is imperative to keep a cool head 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.
This article covers our analysis of the top losers amid Tuesday’s strong market rebound. Of the 4,600 stocks that were tracked, 16 top losers that closed above $1 at market-close on August 4th and lost at least 10% yesterday were analyzed to determine if they would continue going down, or if they would reverse their moves going forward. The following are the some ideas based on that analysis:
Sell Youku.com Inc. (YOKU). YOKU, China’s largest video-streaming company, is more popularly known as the YouTube of China. But in reality it is more a combination of Netflix (NFLX) and YouTube; Netflix, because it offers mostly professionally-generated content licensed from movie studios and TV companies, and YouTube due to its reliance on advertising as a main source of revenue. The stock was among the top losers on an otherwise exuberant day on Wall Street, dropping 14.3% after reporting that June quarter revenue and earnings beat estimates, and showed a strong improvement both year-over-year and quarter-over-quarter.
Specifically, revenue surged 192% year-over-year and 57% sequentially to $30.6 million, versus the $26.5 million estimate; and it lost 3c in the June quarter, an improvement over an 8c loss the prior year and a 6c loss in the prior March quarter, and versus the 4c loss estimate. Furthermore, the company also performed well on other metrics, as gross margin was up strongly to 27%, from 11% in March quarter and -16% in the prior year June quarter; bandwidth costs dropped to 33% of revenues, from 44% in the March quarter and 65% in the prior year June quarter; and content costs were down to 25%, from 28% in the March quarter but up from 17% in the prior year June quarter. The decrease in content costs was still impressive as there was wide concern that they would increase sequentially in the June quarter. Also, on the revenue side, the company reported that brand advertising revenue improved by 181% year-over-year, driven by an increase in both advertisers and average revenue per subscriber.
Despite all these positives, shares sold off strongly on an otherwise exuberant day on Wall Street. It appears that the culprit maybe one or both of two things. First, although the company beat analyst earnings estimates, reporting 3c loss versus the 5c estimate, maybe the street was expecting them to profitable. And secondly, the company announced that September quarter would have 110%-120% year-over-year growth in revenues, which calculates to $35.9 to $37.6 million, only slightly ahead of consensus estimates $35.6 million estimate, and a strong deceleration from prior quarters that have year-over-year quarter revenue growth of 175%-195%. Also, there was limited growth in the company’s higher-margin premium paid content services.
Thus, the quarter outperformance was not stellar enough in the Street’s view to warrant the almost $3 billion market cap. Also, the street may finally be waking up to the fact that it may be difficult for YOKU to turn a profit based on its operating model of paying studios for licensing and then generating its revenue based on advertising, while up-and-coming smaller Chinese companies are able to stay under the radar and distribute the content illegally with zero content costs. Also, competition is heating up in the video-streaming space in China, and unlike in the case of YouTube in the U.S. some years ago, YOKU is not the dominant brand in China. There are way too many upstarts and competing pure play video-streaming services, as well as more establish content providers such as Sina Corporation (SINA) and Baidu Inc. Ads (BIDU) that are also trying to get into the fray.
It is these concerns about the potential profitability of its operating model, the slowing of its growth, and competitive concerns that have led to the steep fall since the stock topped out in April near $70, including the drop yesterday. We believe that the June quarter report did nothing to quell these concerns, and as a result YOKU shares are likely to trade flat to down in the near-term until these concerns are resolved.
Limelight Networks Inc. (LLNW): LLNW provides content delivery network services for television, music, movie, software and social media industries worldwide. Its architecture bypasses the busy public internet using a dedicated optical network that interconnects thousands of servers and delivers massive files at the speed of light directly to the access networks that consumers use every day, thereby assuring its customers that every object in their library will be instantly delivered to every user, every time. The stock rose fell 37% on Tuesday after it reported for the June quarter before the market-open. Earnings came in at a 5c loss, 1c shy of the estimate of a 4c loss, and revenues were also soft at $50.5 million versus the $52.5 million estimate. Furthermore, gross margins were 37%, down from 41% in the March quarter, and the company guided down to $51.7-$53.2 million in revenue for the September quarter, well short of the street estimate of $54.5 million.
What the street was focusing on by delivering such a punishing loss on an exuberant day when the tide lifted almost all boats was LLNW’s dismal gross and operating margins, which deteriorated even further in the current quarter. This is indicative of the tough competition that LLNW is facing from fellow content delivery network companies (CDNs) Akamai Technologies (AKAM) and Level 3 Communications (LVLT). All told, the Street is not confident that LLNW can set its prices high enough in this competitive market to deliver meaningful profits in the near-term, and with the fall in gross margins this quarter they certainly took a step in the wrong direction. We believe that while the fall is certainly warranted based on the dismal margins, the stock may soon find support in the sub-$2 range and remain range-bound between $2 and $3 in the near-term.
Sell Stereotaxis Inc. (STXS): STXS is a developer of cardiology instrument control systems for use in a hospital’s interventional surgical suite to treat coronary artery disease and arrhythmias. The Stereotaxis System enables physicians to navigate catheters, guidewires and stent delivery devices through the blood vessels and chambers of the heart to the treatment sites. STXS was the most significant down-mover of the day as its shares lost 58.2% on Tuesday after it delivered a poor June quarter report on Monday after the market-close. It reported that revenue fell off steeply to $11.6 million, below the $15 million consensus as well as the $15 million in revenue generated in the June 2010 quarter. Also, it incurred an 18c loss, 5c worse than the street estimate, and also well below the 8c loss reported in the June 2010 quarter. Furthermore, STXS announced that its CFO had resigned, and that it was withdrawing previous financial guidance and temporarily suspending providing financial guidance for 2011 in light of recent corporate developments and an uncertain business environment. We believe that even with yesterdays punishing loss, STXS shares are still too risky to buy due to deteriorating business fundamentals and the uncertainty going forward.
Sell Miller Energy Resource (MILL): MILL is engaged in exploration, production and drilling of oil and natural gas in the U.S. It primarily holds interests in approximately 600,000 lease acres located in the Cook Inlet area of Alaska; and 54,500 acres of lease holdings located in the Appalachian Basin, Tennessee. Its shares were down 13.6% on Tuesday, after catastrophic losses earlier since a negative Street Sweeper article on July 28th accused the company, among other things, of over-inflating the value of some Alaska energy assets. We first issued a sell on MILL in our coverage of daily losers on July 29th, the stock has fallen off another 56% after that, and we continue to stand behind that in our belief that with thousands of companies trading in the U.S. public equity markets, there are simply far too many other opportunities to consider in preference to what would be putting your entire capital at risk if these investigations about MILL turn out to be true.
Idenix Pharmaceuticals (IDIX): IDIX is a biopharmaceutical company engaged in the discovery and development of nucleosides, nucleoside analogs, nucleotides and non-nucleosides to treat viral infectious diseases caused by hepatitis B virus, hepatitis C virus and human immunodeficiency virus. Its shares suffered a 15.3% loss on Tuesday after the company reported that in its June quarter results announced on Monday after the market-close, revenue came in at $1 million, and it reported a 15c loss for the quarter. There is nothing unusual in these numbers that could have accounted for the steep drop yesterday; however, shares have been on a tear recently, up almost 150% since early April on the advancement of its lead nucleotide polymerase inhibitor IDIX184 for hepatitis C virus, and the drop yesterday may simply be correcting some of that speculative excess. Furthermore, IDIX indicated that it will have to raise cash (possibly through a secondary offering) sometime in mid-2012.
Getty Realty Corp. (GTY): GTY is a REIT that owns and leases gasoline station and convenience store properties and petroleum distribution terminals. It was down 12.6% on Tuesday after announcing that it hasn’t been paid by its largest tenant, Getty Petroleum Marketing, due to Getty Petroleum’s distressed financial position, weakness in operating margins and cash flow deficiencies.
Sell Enernoc Inc. (ENOC): ENOC operates demand response electric power systems using its Network Operations Center (NOC) to remotely manage and reduce electricity consumption across a network of commercial, institutional, and industrial customer sites and make demand response capacity and energy available to grid operators and utilities on demand. Its shares dropped 25.1% on Tuesday after reporting its June quarter on Monday after market-close. It reported a loss of 51c, 6c shy of estimates, and revenues fell 11.4% year-over-year to $58.9 million versus the $62.3 million estimate. Also, it guided down for the September quarter to $155-$170 million in revenue and $1.45-$1.70 in earnings, well short of the $171 million and $1.90 estimate. Furthermore, it guided down strongly for FY 2011 to $280-$300 million in revenue and a 50c loss to breakeven in earnings versus the $332.1 million and 30c earnings estimate, and it guided down FY 2012 to $1.15-$0.65 loss versus the 40c earnings estimate. A slew of firms, including KeyBanc Capital Markets, Brean Murray, JP Morgan, Think Equity and Ardour Capital have downgraded the stock. We believe that ENOC shares still have downside risk despite the steep losses on Tuesday, and would sell into any rally that tries to fill the gap from yesterday.
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.
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.