The recent turmoil has put a number of valuable businesses on sale. We took a look at five stocks admired by analysts and came to the conclusion that you should consider four of them for your portfolio. One, on the other hand, looks like a sell at these levels:
Netflix, Inc. (NFLX) – Investors may be looking for some catalyst to shock this once high-flying stock back to life after the pounding it has taken since clients fled as a result of huge price increases. That may have come in the form of a new deal just signed with Dreamworks Animation SKG (DWA). While the deal will not affect content until 2013, when it does take effect, NFLX will get a head start on Dreamworks movies and television content, an arena the company has been struggling in, as their deal with Starz has limited life.
In September, the company switched to a double-fee structure for customers that were receiving both streaming and mail-order DVD content. Customers expressed their disapproval of the new pricing plan by cancelling subscription, leading to a massive fall in the stock’s price; the stock, which traded near $300 per share in July, fell to below $130 per share. This represents a significant buying opportunity for investors who believe the company can right itself and continue to grow.
E-Trade Financial Corp. (ETFC) – By the numbers, ETFC is the weakest player in its segment, with financial metrics that cannot compete with competitors Charles Schwab Corp (SCHW) and TD Ameritrade (AMTD). In terms of trailing price-to-earnings, ETFC trades at 32.1, relative to SCHW at 18.9 and AMTD at 14.3. The operating margins are impressive for the competitors as well; where EFTC operates at a margin of 13.7%, SCHW is at 38.1% and AMTD is at 36.4%. Growth favors the other two companies as well.
What EFTC has going for it -- and why it makes an interesting buy at current levels -- is that hedge fund manager Ken Griffin is pushing the company hard to put itself up for sale. While the prospective buyer has not clearly emerged, a buyout would likely come at some premium that could mean a significant return to investors. If this does not happen, the future is uncertain, so this trade should be considered with care.
Applied Materials, Inc. (AMAT) – There are few companies with as dynamic an appeal as AMAT, because this stock offers not only a nice element of tech exposure, but exposure to alternative energy as well. As a dominant player in the semiconductor space, AMAT has plenty of upside in terms of the smartphone and tablet markets. In addition, with a dividend yield of 3.1%, the stock is a more attractive income producer than U.S. Treasuries, which currently yield around 2%. As an income play, this is a solid choice, because the company has demonstrated solid operating results for an extended period.
When compared to KLA-Tencor (KLAC) and Lam Research Corp (LRCX), the company has strong metrics, even in a strong sector. AMAT trades at a trailing price-to-earnings ratio of 7.45, relative to 8.7 for KLAC and 6.8 for LRCX. When growth is added, however, AMAT really shines, with a price-to-earnings over growth ratio of 0.85, relative to 0.98 for KLAC and 1.38 for LRCX. Generally, a reading below 1 is considered positive, and with the added appeal of the alternative energy piece and the income piece, AMAT is very attractive.
Baidu, Inc. (BIDU) – Heralded as the Google (GOOG) of China, BIDU has strong metrics, first-mover advantage in its market, a protectionist local government, and significant upside. As China continues to grow as an economic force, BIDU enjoy a special status within the country, particularly after the dispute that arose between GOOG and the Chinese government several years ago. The potential for the company to expand its circle of influence is significant. When compared to competitors SINA Corp. (SINA) and Sohu.com, Inc., the company looks attractive. On a trailing price-to-earnings basis, where SINA has no price-to-earnings ratio, BIDU trades at premium to SOHU. When growth is included to find the price-to-earnings over growth ratio, SOHU still has the advantage with a ratio of 0.7, relative to 0.9 for BIDU and 4.2 for SINA. Where BIDU runs away with the title is in terms of operating margin, a critical measure in this space – BIDU operates at a margin of 52.2%, relative to 17.3% for SINA and 37.5% for SOHU. With margins like these, there should be plenty of upside remaining in the stock at current levels.
Whole Foods Market, Inc. (WFM) – It is very difficult, and not totally appropriate, to compare WFM to competitors like Kroger Co. (KR) and Safeway, Inc. (SWY). While these three companies technically operate in the same market segment, WFM is sufficiently different in its approach that making a solid comparison is difficult. Where the comparison companies focus on high volume, WFM is much more a niche player. Targeting the more selective, high-margin consumer, WFM is more likely to be affected by similar factors to those that drive the luxury segment. This sets up a joint argument that, on the one hand, the company is likely to be more sensitive to economic downturns, while on the other hand, it can be argued to WFM’s customer base is better insulated and less likely to quickly change their purchasing habits. In terms of metrics that are both important and help to make this point, the operating margin for WFM is 5.5% compared to 2.7% for KR and 2.9% for SWY. While this is a different play than straight grocery, WFM looks attractive at current levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.