The S&P 500 has had its best gaining streak since March, largely because of pleasantly surprising employment data and investors taking a short break from worrying about Europe (thanks largely to ECB Chairman Mario Draghi's "whatever it takes" assurances). With most indices trading towards the high end of their year to date highs, it is obvious that many investors have started considering taking profits, and there is nothing wrong with that. In this world, as long as you make money, you are good. There is no need to be too greedy, because one could fall flat on the face and hit the floor if the feet are not kept on the ground.
Obviously, and I have reiterated in my other writings, even if the market falls, there are stocks that have good quarters coming ahead of them in the long term or are related to the economic recovery at the macro level -- short term market panic is not the right reason to sell such investments (especially on losses), unless of course, you have a better and guaranteed idea to bet on.
Nevertheless, there is one stock which I believe has potential for further appreciation even at these high levels of S&P 500: Sprint (S) -- probably the best turnaround story of 2012.
Previous Price Points
I have been recommending Sprint since June, and the rate of return since each price point is significantly high:
- 06/22/2012, at $3.26: The Thing About Sprint
- 07/19/2012, at $3.71: Sprint Is On The Right Track
- 07/26/2012, at $4.05: Revisiting Sprint Near $4 And My Next Stop
Back To Sprint
Sorry for the important digression.
On August 9 2012, I had put a 10% trailing stop for half my position (there is a rule that I usually follow, and it goes "always sell half on a double"), which I have decided to remove today.
It is very likely that the Europe fear might suddenly rear its head and the market gets punched in the gut due to Fiscal Cliff talks or rumors. But there are still several catalysts in favor of Sprint, even at August highs that suggest not to be overly concerned about protective or defensive strategies at the moment.
Let us revisit Sprint near its 52 week high, and evaluate both catalysts and risks.
- Sprint's most recent quarter showed two important aspects of progress. After a really long while, Sprint showed organic growth -- the company's growth in Average Revenue Per User has increased and margins improved.
- Sprint improved its outlook, increasing EBITDA guidance for 2012.
- Sprint's Network Vision project is on track and has not put additional stress on the company's balance sheet (something that many investors, including me, were very concerned about). Progress and news updates from the company about this project are extremely important, because the whole turnaround story kind of depends on this plan from a fiduciary and the company's growth sustainability standpoint.
- The Nextel sunset has not been horrible, or I should say, "bloody." In fact, the company retained many customers and converted to its existing product line plans.
- The stock is trading closer to 52 week highs, and options activity suggest that investors are expecting a break out.
- Sprint's M&A executive, Keith Cowan, will leave the company on September 30 2012. According to this report, he was known for a tough deal making style and well capable of upsetting a few people on Wall Street. His departure is further evidence that Sprint is not afraid to evolve and improve. Not to undermine Keith's achievement or imply his involvement in past failed deals, but we all know that Sprint's performance in the merger and acquisitions department has not been that good. The Nextel "merger" felt like the company anchored itself to a sinking ship that was chained to a boulder and dropped into the sea.
- Call it lazy journalism, but I am inclined to say that underperformance of most of the above catalysts in the near future becomes an immediate threat to the stock's appreciation.
- Downward consumer trends in the Prepaid space could be a huge impact for Sprint.
So far, the Prepaid market has been kind to Sprint and its competitors and is likely to remain so, but consumer trends change -- sometimes too fast to comprehend -- and a growth market could end up being obsolete in no time. I don't see this happening anytime soon, but Sprint's shareholders must always track consumer trends in Prepaid, Postpaid or any other new disruptive markets or technology in the entire wireless carrier industry.
- As previously stated in other Sprint related articles, keep an eye on Sprint's competitors' actions -- especially AT&T (T) and Verizon (VZ) -- and Sprint's own capital spending. I suggest to monitor free cash flow levels of the company on a quarterly basis, or whenever announced otherwise.
According to Pete Najarian of optionMONSTER, call activity in Sprint's August call options suggests a bullish bet that Sprint will be trading higher by the third week of August. There were big volumes of August calls trading in Sprint, especially at the 5-strike.
But frankly, bullish technicals are for traders, not investors. I believe that Sprint's turnaround is real, and I respect management for its efforts. At this point, we should be eagerly waiting for a spirited "high-five" (pun intended) from Sprint, and my next stop for reevaluating my Sprint position is now increased to the $5.25-$5.50 range.
Disclosure: I am long S.