If you are a college basketball fan as I am, you would know that the name "Cinderella" surges at the top of the most widely used adjectives to describe an underdog team or one that has come out of nowhere to make it to the NCAA tournament - effectively known as "the dance." But if you are a familiar with the true Cinderella story created by Disney, then you would appreciate that (for her) just making it to the dance was only part of the story - she ultimately landed the top prize.
As 2011 winded down, it was abundantly clear that (for many investors) the anxiety was overwhelmingly in favor of just getting this brutal year over with. I suppose it would be fair to say that this was also the feeling for several companies as well. While the tenor was sour toward the end, everyone felt that hope and optimism was just around the corner and hinged upon resolutions of the New Year. So far, by the market's early reaction, after three consecutive strong trading weeks coupled with stellar earnings reports, it seems investors have been somewhat vindicated for their optimism.
At the beginning of December of last year, I started looking for such possible optimistic outcomes in an article that discussed beaten down stocks that have the potential to not only make it "to the dance" but leave with the top price. These were my top Cinderella candidates for 2012. Let's see how they are performing so far.
Name | Call | Date | Call Price | Current Price | Gain/Loss |
Sirius XM (SIRI) | Buy | 12/7/2011 | $1.78 | $2.10 | 18% |
Bank of America (BAC) | Buy | 12/7/2011 | $5.89 | $7.07 | 20% |
Netflix (NFLX) | Buy | 12/7/2011 | $68.14 | $100.24 | 47% |
Research in Motion (RIMM) | Buy | 12/7/2011 | $16.04 | $17 | 6.25% |
Microsoft (MSFT) | Buy | 12/7/2011 | $25.60 | $29.71 | 16% |
Atmel (ATML) | Buy | 12/7/2011 | $9.03 | $10.15 | 12.4% |
While individually these may have presented modest gains within the "Cinderella portfolio," they have together netted 20% on average in just a little over one month. The questions to now consider are, will the January effect continue through the rest of the quarter or is now time to trim off some of the gains if not book profits altogether.
The first stock that comes to mind when I think about just how remarkable its gains have been is Bank of America. Although it comes only second to Netflix in terms of the overall gains within the portfolio, it intrigues to think that only a little over a month ago, the market was questioning if the bank would be able to survive. Admittedly, I was one of those skeptics that looked at it strictly from a technical perspective because its fundamentals were just too much to bear. This fact coupled it its perceived "villainous" qualities caused several prominent analysts to discount its ability to overcome such stressful macro environments.
Well, not only did the company overcome, but it surprised Mr. Market on Thursday with better than expected fourth quarter earnings - to the extent of a profit of $2 billion for its fourth quarter 2011. This came after having posted a $1.2 billion loss during the same period of a year ago. Its full year earnings arrived at $1.45 billion compared to a prior loss of $2.24 billion in 2010. During the quarter, revenue rose 11% to $25.1 billion with earnings coming in-line with analyst estimates at $0.15 per share. As someone who has been extremely critical of the company during parts of last year, I have to extend a great amount of credit for this performance.
Clearly Netflix is another Cinderella that needs to enter the discussion as it currently sports a 47% gain since the initial recommendation on December 7. But all does not appear to be well within the organization despite the impressive stock movement. On Friday, Leslie Kilgore, the company's long time Chief Marketing Officer announced her resignation. Apparently, she is falling on the knife for the rash of customer cancellations that occurred following the company's decision to raise prices last July. When I first heard this news, two questions came to mind - first, what took so long and second, what does it mean for the stock? While the first question was one of rhetoric, the second and most important question may not be so easy to answer when upgrades continue to come in for the stock - on Friday it was an upgrade with a $125 target.
As with Netflix, both Sirius XM and Microsoft share similar stellar performances within the portfolio. Though both firms are executing much better than Neflix with stable management, both firms do have their own sets of challenges. For Microsoft, it's been A Tale of Two Cities, actually, A Tale of Two Weeks. In one week, it issued a warning to analysts about slowing PC sales due to last year's floods in Thailand, and then the company (the following week) reported earnings that not only topped analysts' estimates, but did so by a respectable margin.
Microsoft posted fiscal second quarter earnings excluding items of 78 cents per share, up from 77 cents in the year-earlier period. Net income was $6.62 billion, down slightly from the $6.63 billion a year ago. Revenue was $20.9 billion, a 5% increase from $19.95 billion a year ago, helped by its Office, server software as well as Xbox businesses. This affirms what I have been saying for quite some time which is, although the company is no longer growing to the extent of the late 90s, it still remains a technology force - albeit one that sometimes frustrates investors. This same reason makes it odd to think of this behemoth as a Cinderella, but clearly Apple (AAPL) enjoys the now turned table.
Summary
The common theme in all of these stocks is that (for one reason or another) they have each fallen out of favor with Mr. Market. But their sudden resurgence reminds me of just how quickly investors are willing to forgive and forget. It seems each of these companies have now found the right balance and are now benefiting from performance as well as investor optimism. As glad as I am to have made these selections, I struggle with knowing that scales and easily tip and optimism is only one earnings miss form disappearing.
Disclosure: I am long AAPL, BAC, SIRI, ATML, RIMM, NFLX, MSFT.
