3 Stocks That Might Double

Includes: HLF, SBUX, SIRI
by: Takeover Analyst

Investors could generate some of the strongest returns if they thought like contrarians and were willing to back the controversial stocks. Herbalife (NYSE:HLF) and Sirius XM (NASDAQ:SIRI) are two stocks about wich the media sentiment has been mostly overwhelmed by bearish theses. From David Einhorn's insinuation that Herbalife is a pseudo-Ponzi scheme to the bears' assertion that Sirius is worth less than its net operating loss value, negativity has entered the extreme. Some of the charges leveled against these rising companies demonstrate the human tendency to be absurd in an attempt to be merely controversial and "thought provoking". The truth is that Sirius and Herbalife both have great futures ahead of them.

I am bullish on both companies, due to their excellent moats and expansion opportunities. This contrasts to my take on Green Mountain Coffee Roasters (NASDAQ:GMCR), which I am still bullish on, but mostly in the short-term. All three of these companies, nevertheless, are surrounded by overwhelming negativity that is sure to generate outperformance when it dissipates. Let's dissect the long case by case.


Contrary to the bearish assertions, this direct seller has a supply system wherein distributors are incentivized to drive ever higher orders. Claims of a Ponzi scheme would make sense if the firm hadn't been generating solid free cash flow like it has. Free cash flow has more than doubled from $189.4M in 2008 to $418.92 in 2011, and the stock has gone up 400%, while growth prospects remain strong.

Moreover, growth has been consistently better than expected. During the last five quarters, management beat expectations by an average of nearly 15%. Consensus now forecasts double-digit growth over at least the next two years, which indicates the firm is cheap at 14.1x past earnings. Accordingly, the price target on the firm indicates more than 50% upside, according to FINVIZ.com, and The Street rates the stock a "strong buy".

2012 EPS is expected to be $4.34 and grow 15.2% thereafter (it grew 28% annually over the past 5 years). This means 2016 EPS of around $7.64, which, at a 14x multiple, translates to a future stock value of $106.96. Discounting backwards by 10% annually yields a price target of $66.41. The current price is only justified at an absurdly high 16% discount rate!

Sirius XM

Sirius is also one of those gems where it is easy to generate high returns when the bears prove to be wrong. The broadcaster is expected to grow EPS by around 20.7% annually, which means 2016 EPS of ~$0.23. At a 17x multiple, the future value of the stock is nearly $4. A 10% discount rate indicates a present value of $2.46, which means a 20% margin of safety. Accordingly, analysts rate the stock around a "buy" according to FINVIZ.com.

Sirius is fundamentally cheap, with a virtually monopoly in satellite radio and a liquidation value above the current market capitalization. If you assume (1) 19.8% per annum top-line growth over the next six years and (2) 2.5% into perpetuity, (3) a 10% discount rate, and (4) consistent operating metrics, the fair value of the company comes out to $4.46. This implies that the company will more than double in value. Yet again, the market appears to be factoring in a discount rate north of 15%.

Green Mountain Coffee Roasters

GMCR is yet another Einhorn short that doesn't chime well with the low multiples. The bears have already had their moment with the stock at one-quarter at where it stood just 12 months ago and only one-fifth of its 52-week high. At 10.9x past earnings, the only serious competitor to Starbucks (NASDAQ:SBUX) is drastically undervalued.

Starbucks trades at 30.5x past earnings, but has already gone through the high (ie. exciting) part of its growth curve. With a valuation north of $40B, the law of big numbers is likely to work against continued growth for the leading specialty coffee producer. Over the years, Starbucks has practiced a strategy of market saturation -- that is, the infamous act of locating a store on nearly every corner and in every mall. Those days are over for the firm, but they have yet to come for GMCR.

It is amazing that Starbucks has grown 17.1% annually over the past 5 years, but 18.9% annually is expected over the next 5. By contrast, GMCR has grown 75.4% annually over the past 5 years, and only 37.9% is expected over the next 5.

Analysts expect GMCR's 2012 EPS to be $3.10. At a 14x multiple, the future value of the stock is $43.40. A 10% discount rate would still imply that the stock ought to double to account for earnings power.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in (SIRI), (HLF) over the next 72 hours.

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.

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