5 Volatile Names: What To Do Now?

by: Bill Maurer

The bulls versus bears debate is what makes our stock market great. One person may absolutely love a company, while another might think it is totally worthless. That's what makes the market, and I love hearing the debates on high profile names. Today, I'm going to look at five of the biggest battleground stocks in today's market, some of which have either had big gains or losses recently, and determine if they are safe buys currently, if they are worthwhile shorts, or if you should just stay away. Don't worry if you think there are other names that belong on this list, there probably will be a 2nd part later this week. This will be a multi-part series.

Netflix (NASDAQ:NFLX): If you asked someone with decent market knowledge which five stocks have the biggest bull/bear debates, does anyone doubt that Netflix would be on the list? I sure hope not. Netflix has been one of the craziest movers in the past year or so, and I don't expect volatility will subside anytime soon.

We all know the huge run Netflix made late last year and early in 2012, mostly thanks to a great earnings report. The stock rallied from about $62 to $133, and has settled in recently between $105 and $120. The stock dropped below $107 recently but has rallied back to $115.

Netflix has completely changed their business model, we think, going from DVD and streaming to streaming only (although they started offering DVD only plans again). Combine that with their international expansion, and the company is forecasted to lose a quarter per share this year. Estimates are creeping slightly lower, and current estimates only call for a profit of $2.54 next year. That means Netflix is trading at a forward P/E of 45, which seems rather high for a company only expected to increase revenues by about 15% this year and next, and for margins to continue lower from previous year levels.

After Netflix's earnings report, it seemed like the stock was going to $150, or maybe even higher, but for now, reality has set back in. There are still plenty of negative views out there, including the analyst community, which has an average opinion of "hold" on the stock and an average price target of $96. That's almost $20 below where we are currently, and targets have been decreasing in recent weeks.

In my opinion, Netflix's long term business model is not that great, but given the irrationality around it, I would recommend just staying away unless you are willing to take a huge risk.

Green Mountain Coffee Roasters (NASDAQ:GMCR): Green Mountain was a mild battleground stock going into and throughout early 2011, but when hedge fund leader David Einhorn gave a short presentation on the name, it took the battleground to a new level. The stock plummeted more than 60%, and has gained back more than half of those losses since bottoming below $40.

Green Mountain had a huge rally after its great fourth quarter earnings report, although some seemed troubled by the less than stellar guidance they provided. Right now, there are three major issues. The first question is whether they can achieve the 61% plus revenue growth that analysts are currently predicting for this fiscal year (ending in September). The second question is if there will be any effects later this year when some of their patents start to expire. Bears say this will open up plenty of competition, but bulls say they will patent new items which will maintain their dominance. The third issue has to deal with their financial flexibility. The company has a large amount of inventory on its balance sheet, and has been known in recent times for low cash amounts and poor cash flow.

Green Mountain's conservative guidance has made the average analyst estimate for this quarter's earnings drop by a dime to 64 cents. That leads me to be a bit positive for this quarter's earnings report. Right now, I recommend holding the name or staying away, but if the stock drops to the low $60s I would be a buyer. Right now, the name only trades at 18.5 times fiscal 2013 earnings, which is very fair given the high revenue growth at this company currently.

First Solar (NASDAQ:FSLR): The leading solar name is back to the $30 level, one of the lowest points we've seen in years, after a terrible earnings report. The company reported a huge loss thanks to several charges, and even without them, the company still widely missed on both the top and bottom line.

What's the deal right now? Well, as many would tell you, there is too much supply in the solar industry now, and there are just too many solar companies. Governments are cutting subsidies, especially in Germany, where cuts are expected to be deeper than previously thought. We've seen a few names go bankrupt over the past year, and there is the chance more will. First Solar is not in that category, but it's not in the greatest shape either.

First Solar has now missed earnings expectations three quarters in a row, which is stunning considering how much this company used to beat by. Despite projected revenue growth of 30% in 2012, earnings per share are expected to fall from $6 to $4, and First Solar took down its revenue guidance when it reported last week. Their earnings per share guidance was disappointing, and they've taken down numbers several times over the past six months.

About a year ago, this name traded for $160. Now we are at $30. Although I am negative on the company overall, I think shares could be a buy if we fall a few more points. Just two weeks ago, we were at $45. The solar names have seen great rallies in recent times after these large drops, as those who are short cover their positions. We've seen some of the smaller solar names rally 20-30% in one day, although First Solar usually doesn't rise that quickly. But I could see a short covering rally from $28 to $35 for the name, which would provide ample opportunity for a quick profit. However, I would be skeptical of this as a long term hold right now, and would especially be cautious going into their next earnings report.

Molycorp (MCP): The rare earth mineral processor and producer is near its 52-week lows, just like First Solar. The company sold off after its recent earnings report, despite matching my earnings expectations (based on Yahoo! Finance), but according to Bloomberg, the company beat expectations.

Molycorp is projected to increase revenues at more than 50% this year and almost 80% in 2013. Earnings per share are only expected to rise at about a 20% clip this year, but are expected to take off next year ($4.94 in 2012 from $1.81 this year), and that includes expectations coming down from nearly $9 a few months ago.

The last time Molycorp was at these levels, it rallied from $23 to $32. I don't think the stock is going much lower, so I would recommend you can start buying, although it might be wise to see if it at least tests the $23 low. Molycorp has traded lower after earnings in recent quarters, so even though I see it as a good long term play, it might be a good idea to sell the position before the next earnings report, or maybe hedge your position. You can always buy it back at a lower price if it declines again.

Sodastream (NASDAQ:SODA): The make your own soda at home company sold off after a great earnings report and great guidance, which seems to have surprised some investors. Apparently, the name sold off because sales of its soda machines did not do well, and the reasons over the miss seem to be different depending on who you talk to. Some say that certain stores were out of the machines, while other say that a saturation point is being reached, and enough people already own the soda machines.

Given the great guidance, the selloff appears to be a little much, but we've seen disappointing movement in the stock after the past three earnings report (yes, it did rise initially after the third quarter report, but gains were short lived and it sold off quickly afterwards).

The stock did have a huge rally into earnings, rising from $38 to $47.50 in the month of February. However, it has dropped $7 since earnings. I feel like it will go below $40 here, which would provide an attractive entry point. I would like the name a lot better at $35, with more room for upside there, but I think you can do fine buying it between $38 and $40. This company seems to have good growth prospects and loyal customers as well as investors, so this short-term weakness seems to be limited in my opinion.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MCP, SODA over the next 72 hours.