By David Sterman
The market gets it right about 90% of the time. That's been my experience with stocks that take a big hit or post a big rally. The other 10% of the time, the market reaction appears simply misplaced, and investors need to be patient and wait for logic to eventually prevail.
I've been thinking about that as I review quarterly results for Zipcar (NYSE: ZIP), part of my $100,000 Real-Money Portfolio. The car-sharing company posted a solid quarter, issued (likely conservative) 2012 guidance that is roughly in-line with current forecasts, and the stock got crushed on the news, falling a stunning 15%.
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This is a stock that calls for a level of meta-analysis, and not just plain old analysis, divining what investors are thinking rather than the business this company is actually doing.
In recent weeks, a few analysts issued research updates that predicted that Zipcar would post a strong quarter. For example, Needham & Co. issued a report last month, noting that:
Based on our proprietary utilization checks, we believe Zipcar's 4Q11 revenue should exceed expectations.
Needham figured the company would bag $63.3 million in revenue, just ahead of the $63.1 million consensus forecast. Instead, sales came in at just $62.9 million, meaning the company missed top-line forecast by 0.3%. Investors chose to overlook the fact that Zipcar earned $0.10 a share in the quarter ($0.04 a share when one-time gains are excluded), while the most bullish forecasts anticipated earnings per share (EPS) of just $0.01.
Shares may also be responding to the fact that Zipcar is boosting spending in the current quarter to prepare for the seasonally stronger second and third quarters. Analysts had been expecting a $0.07 a share loss, but management suggests it may be closer to $0.10.
Perhaps the real reason this stock is under pressure is because management once again sought to establish a low bar for the periods ahead. Zipcar crushed EPS forecasts in the June 2011 and September 2011 forecasts as well, exceeding the consensus by 23% and 300%, respectively. As I'll note in a moment, management's failure to issue 2012 guidance above current forecasts appears to have angered some investors.
Investors had been expecting Zipcar to boost sales 21% to $293 million in 2012. The fact that management anticipates sales in a range of $290 million to $296 million, or $293 million at the mid-point of that range, likely comes as a disappointment to some. The net income target of $2 million to $6 million works out to be a range of $0.05 to $0.15 in terms of EPS. Analysts had been forecasting EPS of $0.10. So in effect, forward forecasts are unlikely to change, and still, the stock is getting crushed. Were it not for the increased spending planned for the current quarter, full-year profit forecasts would have been ahead of the consensus view.
This is a classic conundrum of young, fast-growing businesses. As we've seen with stocks like Cree Inc. (Nasdaq: CREE), another holding in my portfolio, investors will focus solely on quarterly trends and completely ignore the long-term path. Zipcar is building a business that won't reach maturity until the middle of this decade. The company's 2012 profit levels are largely irrelevant. What is relevant is that key operational metrics show ongoing improvement. And that is surely the case with Zipcar. On a year-over-year-basis, almost all of the company's trends are moving the right way.
Risks to Consider: This stock is off about 8% since you first read about it last month, and off by low double-digits from the time I bought shares two days later. As I wrote last month:
To be sure, this stock does not enjoy the downside support my other portfolio holdings possess. Shares could easily move toward the $10 mark (from a current $15) if growth materially slowed.
Growth hasn't slowed, but I still think that figure represents the potential floor, and current shareholders may look to put in a stop-loss around $12.50 just in case more of the company's original backers seek to further lighten their holdings, creating fresh pressure on the stock.
I started off with an initial $6,000 investment in this stock last month, and frankly, I'm inclined to build an even bigger stake. But history has shown that it's wise to wait a bit to give more time for any other investors looking to sell this stock to be shaken out.
Disclosure: David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of CREE, ZIP in one or more if its “real money” portfolios.