For much of the past year and a half, stocks have been held hostage to macroeconomic events and fears about the ongoing eurozone debt crisis. In a world of rising correlations, stock-specific drivers and catalysts are all-too-often ignored.
A careful analysis of the global economy and big picture trends is important but careful stock selection still holds value regardless of the macroeconomic outlook.
The conventional wisdom seems to be that 2011 was a bad year for equities with the S&P 500 returning just over 2 percent including dividends and most European markets down sharply. But not all stocks performed poorly; in fact, the venerable Dow Jones Industrial Average managed a healthy 8.4 percent gain for the year and 160 of the 500 stocks in the S&P 500 rallied more than 10 percent. For those with shorter-term trading horizons, there were plenty of profitable swings in individual stocks, both up and down, to generate significant gains.
Every week I assemble a list of stocks that appear to be setting up as profitable short-to-intermediate term trades with specific fundamental and technical catalysts for my Cocktail Stocks service. Here’s a look at seven stocks that are currently on my watch list.
Imperva (IMPV) – Imperva is a small-cap stock involved in the information technology (IT) security market. The company isn’t as familiar to most investors as industry giants like Symantec (SYMC) but has carved out a unique niche within the segment.
Specifically, traditional IT security products are aimed at protecting a company’s network from external attacks. For example, firewall products can look at data packets as they come into a corporate network, examine where they’re coming from and inspect them for potentially malicious code such as viruses. But, this does little to protect a company’s network from internal threats; for example, an employee at a firm stealing information directly from a corporate database or saving a Word document that contains sensitive information about a corporation’s strategy onto a flash drive to remove from the premises.
Imperva’s products are able to monitor how a company’s files and databases are accessed and identify anomalous or unusual behavior that might suggest an attempt to steal data.
The stock went public on November 8, 2011 so it has a limited trading history and is still thinly traded. That said, thin trading is a double-edged sword – while it means that the stock is more volatile than most, it can also mean it moves quickly as investors discover the story and pile into the stock. Imperva could also be an acquisition candidate for a larger IT security firm that wishes to add more functionality to its existing products.
Greenbrier Companies (GBX) -- Greenbrier Companies manufactures railroad freight cars, repairs and refurbishes older cars and operates a railcar leasing business. Freight railcars come in many shapes and sizes including covered hopper cars used to transport grains, tank cars to transport liquids like oil, ethanol and chemicals and flatcars used to carry containers.
The fundamentals of the freight railroad business in the U.S. are extremely strong and I regard the industry as a secular growth story. A railroad can move a ton of freight for about 450 miles on a single gallon of diesel fuel making rail far more energy-efficient than long-haul trucks. In addition, America’s increasingly congested roadways make transporting goods by truck over long distances a less reliable option.
US railroad freight traffic plummeted in the latter half of the 2007-09 recession but has continued to bounce back ever since and traffic showed no signs of slowing during last year’s economic soft patch. According to data from the Association of American Railroads (AAR), total freight carloads in 2011 increased 2.2 percent compared to 2010, led by a 20.5 percent jump in shipments of metallic ore and 11.1 percent in petroleum products shipped by rail. December 2011 brought one of the year’s strongest gains with total freight carloads up 7.3 percent compared to the same month one year ago.
In the most recent quarter, Greenbrier reported it delivered 3,300 railcars up from 1,050 in the same quarter one year ago. Total backlog of railcar manufacturing orders reached 13,300 cars up from about 8,100 a year earlier.
JP Morgan Chase and Company (JPM) – Most investors are familiar with JP Morgan, one of the world’s largest financial institutions. Financials were hit hard across the board in 2011 amid concerns about increasing regulation in the U.S. and Europe, exposure to the ongoing European sovereign debt crisis and weak loan demand in most developed markets as qualified borrowers focus on paying down debt rather than taking on credit.
But, sentiment toward the sector is already extremely bearish and valuations are near levels that have marked attractive buying opportunities in the past. Currently, for example, JP Morgan is trading at less than 0.80 times its book value.
Meanwhile, JP Morgan is widely regarded as one of the best-run of the major financials and, thanks to savvy efforts to reduce risk before the U.S. housing market bubble burst, JP Morgan emerged from the 2007-09 recession in better shape than any of its major peers.
While the U.S. housing market has a long road to recovery, there have been some tentative signs that housing is putting in a bottom. In particular, we’ve seen a steady decline in mortgage delinquencies and in the percentage of U.S. homes that are classified as vacant and awaiting sale. A healthier housing market would be an enormous boon to the banking industry and, for that matter, the economy as a whole.
Technically, the stock appears to be forming a base with a low around $28 and resistance around $37. With sentiment so negative on the financials, the stock would likely see a major upside move from this base if it were to break out in coming weeks.
Web.com Group (WWWW) – Web.com targets small and medium-sized businesses with services related to creating, marketing and maintaining an online presence.
The core of the firm’s business, accounting for about half of revenues, is a domain registration service that allows companies to buy a domain address on the web. Web.com then upsells its customer base with additional services such as the ability to host websites, help with designing an effective web page, support for e-commerce services as well as help designing online marketing efforts.
The big catalyst for Web.com this year will be its acquisition of Network Solutions completed in October of last year. Prior to that deal, Web.com had a total customer base of around 1 million but Network Solutions has more than 2 million customers alone so the combined firm has triple the customer base. And since Network Solutions garnered less revenue out of each customer than Web.com, the firm has an opportunity to up-sell a large number of new customers to its higher margin ancillary services.
Equinix (EQIX) -- Equinix is the world’s largest network-neutral data center provider with 6 million square feet of physical data center space spread across 92 individual data centers on four continents.
The Internet is really a network of individual networks that are interconnected to allow communication. For example, if Verizon is your Internet Service Provider and you wish to send or access data on a Comcast (CCT) network that information must jump from the Verizon (VZ) network to Comcast. While this is generally all seamless to those using the Internet, as you can imagine it becomes increasingly complex and difficult-to-manage as the number of networks grows and the volume of traffic on the Internet explodes.
Equinix’s data centers allow for this interconnection between networks. In a sense, these data centers are the heart of the Internet.
There are several growth drivers for Equinix. First and foremost, traffic on the Internet is growing rapidly due to the proliferation of Internet-connected mobile devices such as smart phones and tablet PCs, as well as the increased use of so-called “cloud” technology where software is provided to users as a service via the Internet.
Another driver is a trend toward outsourcing of data centers. Historically, companies have hosted their own data centers but it’s a capital-intensive business that requires buying servers, special equipment to control heat and hiring an information technology staff to maintain the systems. In addition, if a company’s data center goes down, even for a short period of time, it can result in significant lost revenues. Maintaining that level of service and reliability requires backup power systems, redundant capacity and redundant systems, making it even more expensive.
Equinix locates its data centers close to population centers to ensure low latency, a term that refers to delays in processing data on a network. In addition, the company maintains multiple backup systems to guarantee reliability: Equinix’s platform reliably delivers 99.9999 percent of uptime across its centers.
Micron (MU) – Micron is a supplier of two major types of digital memory products, dynamic random-access memory (DRAM) and flash memory.
The DRAM market has been plagued by weak pricing in recent years due largely to a glut of global manufacturing capacity and excess supply. These price pressures are likely to continue near-term although several major producers are now scaling back their DRAM production operations due to the weak pricing environment. Over time, the cutback in supplies will help to stabilize pricing and margins in this segment.
The growth market for Micron is flash, a more compact form of memory that requires less power than DRAM. Thanks to these advantages flash is increasingly used in a wide variety of consumer electronics applications including mobile smart phones, tablets such as Apple’s iPad, some laptops and digital cameras. Strong growth in these end-markets will continue to power demand for flash; in fact, Micron’s sales of flash are already overtaking sales of DRAM. In addition, the flash memory market is not chronically oversupplied so there’s less pressure on pricing and Micron’s margins are higher.
Micron is forming a base under $7.50 on the charts and looks poised for a quick upside move if it can break higher from that level.
Laredo Petroleum (LPI) – Laredo Petroleum is an independent oil and gas producer that went public in December, 2011. As you might expect the key driver of valuations for energy producers is the quality of their reserves and the potential for production growth.
In particular, I look for producers with significant production growth potential in crude oil and/or natural gas liquids (NGLs) rather than natural gas. Currently, natural gas prices are depressed due to a glut of gas production from unconventional shale gas fields such as the Marcellus Shale of Appalachia, the Haynesville Shale in Louisiana and the Barnett Shale in Texas. The North American natural gas market is likely to remain glutted for at least the next two years and gas prices will remain range-bound near multi-year lows. But the outlook for oil and NGLs prices is far more favorable.
That bodes well for Laredo as its two main operating areas are among the hottest liquids-focused plays in North America: the Wolfberry Trend in the Permian Basin of Texas and the Granite Wash play located in the Texas panhandle and Oklahoma.
The Wolfberry is primarily a crude oil field that was historically produced using simple vertical wells but is now showing even better potential when produced using a combination of horizontal wells and hydraulic fracturing techniques. Laredo has more than 127,000 net acres in the core of this play.
The Anadarko Granite Wash play is primarily known as a rich gas field meaning that natural gas produced in the region is rich in high value natural gas liquids like ethane, propane and butane. Producers are also seeing considerable success with horizontal wells and fracturing in this region and Laredo has about 38,000 net acres in the play.