Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Buy Focus Media Holdings Ltd. (FMCN): FMCN operates the largest out-of-the-home digital advertising network in China through 131,006 flat-panel and 324,364 poster frame displays. Its shares surged 26.3% on Tuesday, rebounding from a punishing 50% loss in the last two weeks, after the company announced an increase in its share re-purchase program from $450 million to $650 million, and also reaffirmed guidance for the September quarter. The company revealed that to-date it had cumulatively spent $315 million in the share re-purchase program, so the increase while providing continued support to the stock on the downside, is also indicative of Management’s strong confidence in its business fundamentals and operating momentum.
We believe that FMCN’s recent 50% hair-cut was an over-reaction to concerns about a slowdown in the Chinese economy, and its impact on consumer spending and advertising. We believe that at least two-thirds of that correction after mid-week of last week was heavily influenced by the broad-based sell-off in Chinese equities, when reports surfaced that U.S. authorities were investigating accounting irregularities at U.S.-listed Chinese companies. We believe that FMCN by virtue of its being the largest and most respected advertising company in China, its long-term operating momentum, strong history of cash flow generation, having Deloitte as an auditor, and coverage by major banks such as Goldman and JP Morgan is probably above that fray, and that its shares were unjustly punished in the China stocks sell-off last week.
Even after today’s sharp surge, FMCN shares trade at only a forward 10 P/E, a discount to the projected earnings growth rate of 26% from earning $1.20 in 2010 to a projected $1.99 in 2012. Furthermore, the company has a track record of beating analyst estimates by wide margins, as in the June quarter when it reported 44cents (versus 37cents estimate) and also beat revenue estimates. We believe that FMCN is in the buy range here, but given today’s surge, we would buy small and in stages to take advantage of a likely dip back to the $15 range in the next few weeks.
Sell General Maritime Corp. (GMR): GMR is a provider of international seaborne crude oil transportation services in the Atlantic Basic with a fleet of 31 vessels. Its shares slipped another 7.4% on Tuesday, down over 90% year to date, after the company announced amendments to its credit facilities that waived the minimum cash balance covenant until November 10, 2011. Furthermore, the company indicated that it was continuing to review its financing options, and is currently considering various alternatives with respect to the restructuring of its capital structure. GMR has been bleeding losses since the tanker market crashed in 2009, and its balance sheet currently shows $59 million in cash, and a short- and long-term debt of $37 million and $1.32 billion. The company has incurred operating losses during at least four of the latest quarters, and interest payments on the debt are in the $27 million range. Based on this, we believe that GMR may be having difficulty in servicing its long-term debt, and that there is a high risk that Tuesday’s amendments announcement could be a pre-cursor to a bankruptcy filing by GMR in the near future.
Sell Omnicare Inc. (OCR): OCR provides pharmacy distribution and consulting services to long-term care centers and hospitals in 47 states and D.C. Its shares plummeted 14.7% on Tuesday on reports that the U.S. government’s Centers for Medicare and Medicaid Services (CMS) proposed new rules to curb over-prescription to seniors, in another effort aimed at healthcare players who may be gaming the system for (hold your breath) higher profits. Under the new rules, CMS would require nursing home operators to hire independent pharmacists to review their residents’ drug regimens, as opposed to the current practice of outsourcing them to pharmacy suppliers such as OCR and PharMerica (PMC). Furthermore, the CMS also cast doubt on the proposed takeover of PMC by OCR, indicating that it would take a dim view of the combination as the three largest long-term care pharmacy companies already control 90 percent of the market.
We would avoid shares of OCR and PMC here as even in the best-case scenario, it is likely that their volumes, and hence revenue and earnings, will drop off significantly, given the CMS’ focus on curbing over-prescription to seniors. And if CMS does succeed in requiring nursing home operators to move their business to independent pharmacists as proposed, then this would be a huge negative to OCR and PMC, and even their steep recent drops have not factored in the negatives from that scenario.
Buy Omnivision Technologies (OVTI): OVTI is a designer of digital and analog image sensors for compact cameras used in mobile phones, notebook computers, and webcams. Its shares surged 14.2% yesterday after Apple’s (AAPL) announcement that the iPhone 4S will contain an 8MP camera that features an image sensor using backside illumination technology, which is one of the key features OVTI’s chip.
OVTI shares have been in a steep corrective mode in recent months, losing nearly two-thirds of their value since topping near $35 in mid-July on fears that they were losing the iPhone image sensor designs to rivals Sony (SNE) and Samsung (OTC:SSNLF). We believe that yesterday’s announcement by AAPL counters those fears, indicating that OVTI will retain that business at least for the time being. Its shares however seem to factor in almost a complete loss of the iPhone business. OVTI has a strong balance sheet, with almost $600 million in cash and investments less debt, while it closed at a market-cap of almost $900 million yesterday. With a projected $2.46 in earnings, it trades at a cash adjusted forward 2 P/E, making it a steal at current prices.
Buy Merge Healthcare Inc. (MRGE): MRGE develops medical imaging, clinical workflow process, and patient information management software applications. The medical imaging software solutions support end-to-end business and clinical workflow for radiology department and specialty practices, imaging centers and hospitals. The patient information management software applications improve their customers' productivity and enhance the quality of the patient experience. Its shares gained 15.6% on Tuesday, after Dougherty & Company raised the price target on the company to $8.50. We recommended a buy on MRGE on August 4, in our daily coverage of news movers, and stand by that call.
Sell Transcept Pharmaceutical (TSPT): TSPT is a development stage biotech that develops proprietary therapeutic products in the field of neuroscience. Its lead product candidate is Intermezzo, a low-dose sublingual formulation of zolpidem for use as a sleep aid in the middle of the night at the time a patient awakens and has difficulty returning to sleep. The stock rose 33.3% on Tuesday after it was granted a shorter review period of two months for its experimental sleeping drug Intermezzo, with the PDUFA set at November 27. We covered TSPT earlier in our daily review on September 19, recommending a sell, and stand by it. Furthermore, the current news on the shorter time for review was already anticipated in the company’s press release on September 14, when it announced that the FDA had indicated that it would consider the re-filing of Intermezzo as a Class-1 response.
Other major movers yesterday included the following: