What follows is a list of hot stocks from very different sectors: direct selling, online retail, and broadcasting. I remain bullish on all three of these companies for various reasons over different durations. While I recommend Herbalife until shares return to north of $80, I recommend investing in Groupon only in the three trading days following the Facebook IPO, and I recommend investing in Sirius over the next three years or so.
I recently stated that Herbalife's valuation was "baseless" and that the stock could double. I criticized the irrationality of the market to instill so much faith in David Einhorn's short thesis. When Einhorn failed to mention his bearish thoughts at the Ira Sohn Conference, the stock subsequently rallied 16.7% and was up 4.8% more after hours.
For a company that has delivered terrific recent results and has a low price-to-free cash flow ratio, the fundamentals are solid. Herbalife even offers a reasonable dividend yield of 2.4%. For a company that is being implicitly accused of sketchy accounting, it is rare to see such a reasonable dividend yield. I expect the stock to rally when the second quarter is over and results prove strong yet again.
Groupon is an interesting way to play the Facebook (FB) IPO. Even though it is not a social networking company, it has that "social media" / "next generation" vibe going for it. Regardless, investors appear to have scoffed the IPO price given that the valuation is less than half of where it was when Groupon debuted. When Facebook IPOs, hype is likely to shift shares higher at least in the first day.
If a company (read: Facebook) that gets around 15% of its revenue from a company marketing a virtual farm can trade at more than 100x earnings why can't Groupon similarly trade at a higher multiple? Facebook's growth, after all, has slowed more than what the Street anticipated. In the short-term, I thus recommend Groupon.
Sirius XM (SIRI)
To value Sirius, I employ a DCF model. In this DCF model, I make several assumptions: (1) 19.8% per annum growth over the next half decade or so, (2) operating metrics staying at historical levels, (3) a 2.5% perpetual growth rate, and (4) a discount rate of 10%. Based on these assumptions, find Sirius to be worth $4.46, implying that the stock will more than double.
Sirius has delivered impressive performance - so, impressive that management has had to raise its net add guidance from 1.3M to 1.5M for FY2012. Management is also on track to delivering $700M in free cash flow this year, which is attractively 9.4% of market value given the growth. With a beta of 2.1, the stock is well positioned to close its value gap each time the bears are proved wrong.
Disclaimer: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.