Volatility and correlation in stocks is high. Macro-economic headlines regarding the Eurozone's debt debacle and China's slowing economy rule the day. The summer doldrums have arrived just as they have for the past two years.
Many investors unfortunately take their eye off the ball during these times distracted by a myriad of negative economic reports rather than focusing on company fundamentals. This often drives prices in fundamentally strong stocks down. This is precisely the time to look for buying opportunities in stocks with good prospects for future growth and decent fundamentals.
I have selected five companies reporting earnings in the next few weeks to review. I believe three are poised to move higher while two will most likely disappoint. The bar has been set extremely low this earnings season. Even so, I believe certain companies are facing significant headwinds lowered expectations can't help.
In the following sections, we will take a closer look at these stocks to determine if the mean target prices are justified. We will perform a brief review of the fundamental and technical state of each company. Additionally, we will discern if any upside potential exists based on sector, industry or company specific catalyst. The following table depicts summary statistics and Monday's performance for the stocks.
Boston Scientific Corporation (BSX)
BSX is trading well below its consensus estimates and its 52 week high. The company is trading 30% below its 52 week high and has 30% potential upside based on the analysts' consensus mean target price of $6.82 for the company. BSX was trading Monday for $5.26, down over 2% for the day.
BSX has some strong fundamentals. BSX has a price to book ratio of .66 and an EPS growth rate of 11.63% for next year. BSX has a forward PE ratio of 10.96. EPS is up 160% quarter over quarter.
BSX has had a series of positive catalysts recently even as the stock has taken a nosedive since the start of July. BSX's Infinion 16 Percutaneous Lead, a spinal cord stimulation therapy, performed well in a trial and significantly reduced pain in patients when used with the Precision Plus SCS System. Boston's Clik Anchor also demonstrated good results in reducing the migration, or movement, of SCS leads.
- During the latest 12-month (LTM) period ended March 31, 2012, BSX has operated with relatively stable leverage (total debt/EBITDA), ranging between 2.0-2.5x, although current leverage at 2.5x leaves little flexibility for additional debt.
- BSX's business model reliably generates solid FCF, owing to strong margins, relatively dependable revenue and manageable CAPEX requirements.
I believe BSX is buying opportunity at this level. They seem to have the firepower for a great earnings call. BSX reports earnings before market open on July 26th.
RadioShack Corp. (RSH)
RadioShack reports earnings before market open on July 25th. RadioShack is trading well below its consensus estimates and its 52 week high. The company is trading 75% below its 52 week high and has 36% potential upside based on the analysts' consensus mean target price of $5.03 for the company. RadioShack was trading Monday for $3.69, up basically flat for the day.
Fundamentally, RadioShack has some positives. RadioShack is trading for 50% of book value and only 10% of sales. EPS next year is expected to rise by 37.93%. Insider ownership is up 8/5% over the past six months. The company pays a dividend with a yield of 13.55%, although the payout ratio makes it questionable.
The problem with RadioShack is it's a falling knife at this point. All the moving averages are heading straight down with not a glimpse of upward momentum in site for the past year. I believe Amazon (AMZN) and Best Buy (BBY) are stealing market share from RadioShack. I would avoid this stock. Their business model may be broken.
Sprint Nextel Corp. (S)
Sprint reports earnings before market open on July 26th. Sprint is trading below its consensus estimates and its 52 week high. The company is trading 32% below its 52 week high and has 9% potential upside based on the analysts' consensus mean target price of $3.90 for the company. Sprint was trading Monday for $3.57, down over 2% for the day.
Fundamentally, Sprint has some positives. Sprint is trading for slightly over book value and only 31% of sales. EPS next year is expected to rise by 28%. Insider ownership is up 45% over the past six months.
The company has had a series of news reports lately that should provide the impetus for the stock to continue moving higher. Nevertheless, Sprint has gone somewhat parabolic lately and is trading 21% above its 50 sma and 36% above its 200 day sma. I like the stock but feel earnings may be a sell the news event. I would avoid Sprint into earnings and look for a chance to pick up shares at a more favorable entry point.
SIRIUS XM Radio Inc. (SIRI)
SIRI reports earnings on August 7th. SIRI is trading below its consensus estimates and its 52 week high. The company is trading 14% below its 52 week high and has 25% potential upside based on the analysts' consensus mean target price of $2.57 for the company. SIRI was trading Monday for $2.08, down almost 1% for the day.
Fundamentally, SIRI has some positives. SIRI has a forward P/E of 19 and trades for 18 times free cash flow. EPS next year is expected to rise by 38%. Quarter over quarter sales and EPS are up 11% and 22% respectively. SIRI's TTM ROE is 80% and the company's net profit margin is 14.75%.
The stock recently soared after the company reported new subscriber totals and raised its revenue guidance for 2012. The fact SIRI trades for 18 times free cash flow and the net profit margin is 14.75% is noteworthy.
When companies preannounce positive results I begin to worry earnings will be a sell the news event. Nevertheless, the stock has held the $2 mark since the beginning of July. I am considering starting a position prior to earnings on August 7th. The stock is a Buy.
Vringo, Inc. (VRNG)
Vringo reports earnings on August 14th. This is a highly speculative play I have been looking over for quite some time. I feel you should have a small percentage of your portfolio dedicated to a speculative long shot. Recently, SA author John H. Ford wrote an article with an in-depth analysis of the Vringo situation. This is basically a patent play. I don't normally get involved in patent plays because it's not about the fundamentals it's about winning a patent case and I'm not a lawyer by any means. Even so, the fact that SA author James Altucher is also involved intrigues me. I love Altucher's work. I'm a fan. He is intimately involved in the situation and wrote a great article regarding Vringo as well. Ford says Vringo is at least a ten bagger. The following is the most important point from his article,
But here's something that I think may be more important than anything else I've written in this article. Donald Stout was so impressed with Vringo's patent portfolio that he invested his own funds and currently owns over 1 million Vringo shares. He has the background and experience to make an informed decision about the quality of Vringo's patents, and his vote of confidence speaks volumes about the strength of Vringo's patents. His due diligence was greater than anything you or I could even come close to achieving. If a patent attorney and patent examiner such as Donald Stout buys Vringo shares, I am a buyer also.
Patent law suits can often go on longer than investors can stay solvent. The stocks involved often have wild swings as motions and appeals are won and lost. Nonetheless, if your suitability allows, this may be one to consider for your speculative money.
Stocks trading for $5 or less tend to be more volatile with frequent, larger percentage moves in the stock price. This provides the opportunity for greater returns (or losses) relative to the market. These companies often provide more bang for your buck.
The current situation in Europe has created some buying opportunities and I believe three of the five stocks covered fall into that category. Sprint is as well, nonetheless, I would avoid starting a position prior to earnings. RadioShack is in a downward spiral and there is no sense in catching a falling knife.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in 10% at a time on a weekly basis to reduce risk and setting a 5% trailing stop loss order to minimize losses further if you wish.