5 Stocks To Sell Before The Market Pulls Back

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 |  Includes: AA, BAC, NFLX, ORCL, SIRI
by: Richard Saintvilus

"Flat" would be the way that I would describe the market's activity on Wednesday as the market turned its attention to Greece on whether or not it would accept reforms as part of its bailout to avert default. But nevertheless, the broader markets continue to be filled with the sort of optimism that reminds investors of the glory days of the tech bubble. Oops, did I just say that? However, the Greece situation notwithstanding, it seems that investors have already made up their minds that they are not going to let issues abroad spoil this bull party.

On Wednesday, the host of the party was Cisco (NASDAQ:CSCO) which reported better than expected earnings and inspired the market with its rosier than expected outlook. I think it is safe to say that the return on technology spending is in full swing. And yet Cisco is another company that reported earnings and logged a Wall Street beat. So far, of the 315 companies in the S&P 500 that have reported earnings to date, 61% have come in above analysts' expectations. While it's not a great percentage, it is pretty much better than what the market experienced a short two years ago.

For the day, the Dow was up 5.75 points, or 0.04%, at 12,883.95. The S&P500 rose 2.91 points, or 0.22%, at 1,349.96. While the Nasdaq added 11.78 points, or 0.41% to close at 2,915.86. The Dow has gained 21% since early October, which has prompted several economists to suggest that a pullback just might be imminent. This notion has caused me to pause and wonder if it is time to take some profits in the following stocks.

Company

Ticker

Start Price

Current Price

Percentage Gain

Bank of America

BAC

$5.50

$8.13

35.4%

Netflix

NFLX

$69.29

$124.00

78.9%

Oracle

ORCL

$24.32

$28.73

18.46%

Sirius XM

SIRI

$1.47

$2.19

46%

Alcoa

AA

$9.18

$10.67

13.5%

Click to enlarge

Bank of America - Target $10

To truly consider the optimistic recovery for Bank of America, the best bullish case that I have read so far on the year comes from Fellow Seeking Alpha Contributor Spencer Knight, who offered from both a fundamental as well as a detailed technical perspective on why BofA has a bright 2012. Last week, during its fourth quarter earnings announcement, the bank gave investors many reasons to believe that a bright outlook for the year was indeed possible by reporting a profit of $2 billion dollars for the quarter. It came after having posted a loss of $1.2 billion during the same period last year.

Its full year earnings arrived at $1.45 billion compared to a prior loss of $2.24 billion in 2010. For three months prior, the primary question surrounding the company was, can it execute its business effectively enough to make any money? Since that question has clearly been answered, the new question is, can it build on this momentum? I think that is what investors are waiting to see before pushing the shares higher. As great as the recent quarter was, it goes without saying that Wall Street always prefers trends.

Netflix - Target Undecided

Clearly I am unsure of how to value movie streaming giant Netflix. But one thing that I am certain of is that its recent run-up of 80% is highly unusual. The obvious question that should be asked in making an informed investment decisions should be: Have the concerns that caused it to drop from $300 to below $69 been addressed? The answer to this is no. But it does not seem to hinder optimism that the company can fix its problems. Another question is, is this optimism justified? That remains to be seen.

However, to its credit, it's doing its part to show that it can run its business effectively as evident of its recent Q4 earnings report - one that arrived better than expected. For Netflix it was like night and day from one quarter to the next. The company said that it has gained more than 600,000 subscribers in the fourth quarter. This compares to the 800,000 that churned out in the third quarter, which resulted in the stock plummeting to its recent lows. Things are indeed starting to look up, but strictly from a valuation standpoint, I continue to feel that the recent gains should be immediately locked in.

Oracle - Target $35

Thanks to the Fed, one of the advantages of lowered interest rates is that it allows businesses to borrow more money at lower rates. When companies are able to borrow, they are able to spend on improvements that bring efficiency to the enterprise. This is where a return of tech spending will help firms such as Oracle, where it specializes in cloud computing services. However, the company still has its own challenges to deal with as is evident by its recent earnings report.

In the quarter ending November 30, the company reported a profit of 54 cents per share, while analysts were projecting profits of 57 cents. The bright side of the report was that new software sales rose slightly - 2% year-over-year to $2 billion. Management had also reported that it expects hard revenue declines of 5% and 15% while projecting new software sales growth of flat to 10%. It was this earnings disappointment that served as a catalyst for the stock's drastic decline. But I tend to think that the company now presents a tremendous value.

With the stock now trading just under $29 after having bounced off its low of $24.72 in August of last year, its growth projections currently place a valuation at $35 - this is even on the most conservative assumptions.

Sirius XM - $2.50

I've recently sold out of my position in Sirius at a price of $2.15, even though the company was heading into its Q4 full year 2011 earnings announcement. I made the decision because of what I felt to be the fair market value of the stock. For the company, consensus estimates are at 1.5 million net subscribers for 2012. Coming from someone that appreciates both the good and the bad, I am eager to see if the company will low-ball guidance as has been the norm? With several of the auto manufactures having reported stellar earnings as well as positive outlooks, it will be hard to receive guidance from Sirius this time that does not align with projected auto sales.

For the stock, I think that any projection at 1.5 or below will likely send the shares lower. But any other nuggets regarding stock buybacks, dividends or unknown projects may not only stabilize it, but send it higher. As I've said before, I remain bullish on the company long-term and feel that its prospects for this year are outstanding. But for a stock that rarely trades on fundamentals, I'm choosing to take my gains now - even at the risk of leaving a lot on the table. This week, my conviction was to sell. After the company reports earnings, this conviction may change and I may re-establish a long position. But it will be because Sirius inspired me to do so by virtue of its report.

Alcoa - Target $15

The case for Alcoa is simple: Aluminum will always be needed in our everyday lives. When you couple this fact with the company's shares being undervalued, it makes for a great investment. Investors need to consider that Alcoa's stock is worth slightly more than the $9.65 billion in tangible book value on its balance sheet. Yet that book value figure is quite understated because the value of a number of manufacturing facilities has been written down due to depletion. In terms of replacement value, if one were to build Alcoa's factories from scratch, then you're likely looking at a market value closer to 40% lower than the real value of the company's assets.

Equally important, Alcoa should remain free cash flow positive, even if the global economy slumps further in 2012. A weak economy would actually benefit Alcoa as higher-cost rivals get flushed out. As it stands, many aluminum producers are operating at a loss with aluminum trading for roughly $1 a pound. That's a price point at which Alcoa can still turn a profit. The fact of the matter is aluminum and many of its characteristics are needed in several large business productions mainly for its high strength to weight ratio as well as its ability to resist corrosion. Because of this, several large companies should become large consumers of aluminum as they evolve into utilizing it more into large consumer items such as vehicles and home appliances.

Disclosure: I am long CSCO, ORCL, BAC, AA.

Additional disclosure: Author may initiate a long position in SIRI at any time