By David Sterman
In just a matter of days, the third quarter will finally come to an end, and barring an end-of-the month rally, investors will be tallying up the losses. As it currently stands, the S&P 500 is on track for a 15% loss, erasing all of the gains of the previous three quarters.
But some stocks have been able to swim against the tide, posting impressive breakouts in the past month. Of course, the easiest path to upside is to receive a flattering and lucrative offer from a suitor. These six stocks have all received buyout interest in the past month.
Another tried-and-true catalyst: announce plans to shake up your business to unlock shareholder value. That's just what these companies have done.
At the end of the second quarter, I suggested shares of footwear retailer Collective Brands (NYSE: PSS) would rally if the company appointed a new CEO with vision to "implement needed corrective actions -- perhaps accelerating the international store expansion or taking a fresh look at merchandising efforts. Another bold move would be to cull the weakest 10% of stores from the company's 4,800 store base.
" Well, there's still no new CEO, but the company's board seemed to follow that advice, because Collective Brands announced plans in late August to close roughly 475 stores.
The stock rose from $10.24 before the announcement on Aug. 24 to $13.49 by the end of the month, but has since given back about a third of this gain. By my math, shares are still quite cheap, trading below book value and less than five times earnings before interest, taxes, depreciation and amortization ((EBITDA)). This may explain more recent rumors that private equity (PE) firms may be looking to acquire Collective Brands.
Plans to close a handful of underperforming stores have also given a lift to shares of home electronics retailer Conn's (Nasdaq: CONN) management needs to do something. As I suggested back in early July, this stock trades far below book value. As of the end of July, tangible book value stood at $361 million, while the market value of its stock is worth just $227 million. Sales growth remains anemic for Conn's, but management is handling margins very well, and full-year profits are likely to be higher than previously thought. Analysts have sharply boosted their profit forecasts in recent sessions.
To boost its stock, real-estate data firm CoreLogic (Nasdaq: CLGX) has hired investment bankers in hopes of finding a buyer for the company. It's likely too risky to pursue the stock after it has rallied so much, especially as it would likely fall sharply if a buyer can't be found.
There are plenty of other names making an upward move in an otherwise down market. Sandisk (Nasdaq: SNDK) and Micron (NYSE: MU) are up roughly 20% in the past month, as investors take note of the expected spike in demand for flash memory in tablet computers and smartphones. Micron looks especially cheap, trading below its $8 in tangible book value. [You can read more on my take on Micron in this article.]
Perhaps the happiest company in an otherwise unhappy month is Stamps.com (Nasdaq: STMP), which is seen as a likely beneficiary if the U.S. Postal Service decides to close many branches and cease Saturday operations altogether. The stock rallied nearly 40% in the past month on hopes more consumers would become aware of the company's online postal services.
Even before this potential catalyst, the business looked fairly healthy. Second-quarter sales grew 26% from a year earlier and per-share profits of $0.39 were far ahead of analysts' forecasts. Shares have responded in kind, moving up 100% from the 52-week low. To justify further gains, investors would need to see a clear path to even better results. And this appears to be precisely what investors can expect.
This is a fairly automated business model, and any revenue gains can flow quickly to the bottom line. For example, in the most recent quarter, sales rose $3.8 million sequentially while gross profits rose $3.3 million. Operating income rose $3 million quarter-to-quarter. This means more than 75% of the revenue gain went to the bottom line. This leverage helps explain why analysts expect sales to rise 15% this year to $99 million, but earnings per share (EPS) to rise 30% to $1.21. Shares trade for about 16 times projected 2011 profits, and this multiple could expand into the mid-20s if management can take advantage of the expected shrinkage at the U.S. Postal Service.
Risks to Consider: As these stocks have moved up, they may become tempting targets for profit-taking if investors seek to raise cash from losing trades elsewhere.
The real charm of these breakout stocks may be yet to come. The tough stock market has likely restrained them from climbing even higher (expect for those receiving buyout offers). When the market stabilizes, you may be able to ride some of these momentum names as they continue their upward trajectory.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.