Don't Let Your 2012 Winners Become Your 2012 Losers

by: Bill Maurer

Two weeks into the new year, US markets have gotten off to a decent start. The S&P 500 is up almost three percent, and there has been some decent economic data. However, European negativity still abounds, and the recent downgrades were no surprise. As we head into the heart of earnings season, the question remain to be seen is whether corporate reports or economic issues will rule the day.

Now, Gordon Gecko once said "Greed is good." To an extent, that phrase can be true. Those who aren't willing to take any risks in the market won't make any money from it. That fact is true. However, greed is not always good, ask anyone who has ever taken a loss on a stock. We are just two weeks into the year, but there have been some decent winners so far. However, whether you have held these names through their rallies or are looking to now enter a position, you have to make sure that these winners don't become losers.

Let's look at the gains first:

Company 2012 Start Current Change
Netflix (NASDAQ:NFLX) $69.29 $94.38 36.21%
Bank of America (NYSE:BAC) $5.56 $6.61 18.88%
Lululemon (NASDAQ:LULU) $46.66 $61.96 32.79%
Molycorp (MCP) $23.98 $28.69 19.64%
First Solar (NASDAQ:FSLR) $33.76 $39.92 18.25%
Sodastream (NASDAQ:SODA) $32.69 $39.96 22.24%
Ford (NYSE:F) $10.76 $12.04 11.90%

All seven of these names are up double digits so far this year. Some of them are up over 30% even, and most of these aren't exactly small cap names. Two of these names are close to their highs for the year, but the rest have started backing off. Winners can become losers quickly, and gains can evaporate faster than you can read this article. The following table shows you how far these names have backed off their highs already.

Company Current 2012 High Change
Netflix $94.38 $99.84 -5.47%
Bank of America $6.61 $7.02 -5.84%
Lululemon $61.96 $62.25 -0.47%
Molycorp $28.69 $30.19 -4.97%
First Solar $39.92 $43.49 -8.21%
Sodastream $39.96 $41.88 -4.58%
Ford $12.04 $12.18 -1.15%

First Solar may be up 18% this year, but ask anyone who bought over $43 recently how that makes them feel?. Bank of America opened above $7 the other day, and within minutes was under $6.90. All seven of these names have done well so far this year, but some have already lost quite a bit of their names. Let's look at the key issues for some of their rally and near term outlooks for each.

Netflix: Surprisingly, one of 2011's big losers that was left for dead has rallied sharply to start the new year. It appears that there has been a bit of short covering, and Netflix just launched its service in the UK and Ireland. Also, a report that users are streaming billions of hours in content lit a fire under shares recently, despite concerns that perhaps more subscriptions were lost in Q4 that the company originally guided to. Netflix will release their earnings report next Wednesday, the 25th, after the bell. That report will be the ultimate test for the rally. Netflix has already announced it will lose money for all of 2012, but yet the consensus number from analysts is still for a profit. Netflix could easily lose all of its 2012 gains after that earnings report, and then some. It could also double these gains, but you have to determine if the risk is worth taking after such a large rally.

Bank of America: Another one of 2011's losers has been a big winner so far this year, but the stock has already lost over a quarter of its gains after touching the $7 mark. Bank of America is expected to post a profit when it reports fourth quarter earnings Thursday morning. Investors have felt a lot better about the banks lately, as they have been one of the best performing sectors recently. We are know in the midst of their busiest week for earnings, so we should know by the end of the week whether or not these gains will hold or not.

Lululemon: Shares of the Canadian athletic apparel retailer have done exceptionally well so far this year. The first leg of their gains was due to the company receiving a great analyst note, and getting put on the conviction buy list at Goldman Sachs. The second half of its gains were after the company raised its fourth quarter revenue and earnings guidance. Their is plenty of good news around the name currently, but the stock has gotten rather expensive recently. I like the company and their future, but the stock is up almost 50% since it bottomed after its last earnings report. It is due for a pullback.

Molycorp: Shares of the rare earth mineral producer and processor have started to rebound in 2012 after a bad 2011. I called the name one of my top growth picks for 2012, and I'm standing by that call. This company is growing revenues tremendously at the moment. However, expectations were too high in 2011 and that set up the stock for disappointment. Now that expectations have come back down to more realistic levels, the stock can start to rise again. On a percentage basis, the stock is up big so far this year, but it can do much better if it grows as expected.

First Solar: Solar stocks saw huge declines in the second half of 2011, and they have seen huge rebounds so far this year. However, earnings estimates are still coming down, and many of the smaller names, primarily the Chinese based ones, are expected to lose a fair amount of money in 2012. These companies carry high debt loads, which means further capital raises may be needed. First Solar lowered its 2011 numbers several times as the year progressed, and I'm not quite sure they feel that they have hit the bottom yet. Their next earnings report will be key not only for the company, but for the entire sector as well.

SodaStream: Shares of the make your own soda at home company started off 2012 with nice gains, and some of it is due to their recent deal with Kraft (KFT). It's a small positive for the company, but not a total game changer yet. The company has done a nice job of expanding its product line and getting into more US retail locations. There is plenty of growth ahead for this company, but expectations need to be realistic. This stock saw its bubble burst in 2011 when expectations got too high. It is likely to report a good quarter when it reports, but that is still probably a month and a half away.

Ford: Shares of the US automaker have done quite well so far in the new year, but the company's valuation has stretched a bit recently. Ford announced great sales growth in December and for the full year (in terms of vehicles sold), but earnings are expected to be flat to down year over year. In fact, 2012 earnings are expected to be a chunk lower than 2011, and expectations are coming down almost weekly. About three months ago, Ford was trading at just 6 times 2012 earnings. Now it is trading above 7.7 times. I sometimes am called a bear on these names, and that's not really true. My only point is that expectations are coming down, and that has caused valuations to rise a bit lately. That's an important point to consider if you are planning on entering the name at these levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.