The stocks covered in this article have major EPS growth expected for next year. On average, these five companies have over 50% projected EPS growth. Genworth Financial Inc. (GNW) has the highest projected EPS growth at 91.04% while Fortress Investment Group LLC (FIG) has the lowest, yet still significant, at 26.19%.
Each time you consider starting a position in a stock, you should prudently scrutinize its EPS information. EPS growth is the financial objective businesses strive to achieve.
Additionally, the five stocks are trading at or below $5. Stocks trading for $5 or less tend to have higher betas and 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 are stocks with market caps of $2 billion or greater. We are attempting to discover solid companies that may provide more bang for your buck.
The question is, is it really time to buy or sell? A stock that appears to be a bargain based on fundamentals, but has no near term catalyst for recovery could be dead money for quite some time. The fundamentals trap investors into buying the stock and it never improves. Sector, industry or company specific headwinds that have not yet been factored into current prices may be on the horizon. You cannot rely on one aspect of a stock to determine whether it is time to buy or sell.
In the following sections, we will perform a review of the fundamental and technical state of each company. Additionally, we will discern if any up or downside potential exists based on sector, industry or company specific catalysts. The following table depicts summary statistics and Wednesday's performance for the stocks.
(click images to enlarge)
Advanced Micro Devices, Inc. (AMD)
AMD's EPS is expected to grow by 43.33% next year. The company is trading 50% below its 52 week high, and has 37% upside potential based on the analysts' consensus mean target price of $5.75. AMD was trading Wednesday for $4.19, up almost 2% for the day.
Fundamentally, AMD has some positives. AMD trades for 8.72 times free cash flow. The company has a forward P/E of 9.74. Insider ownership is up 51% over the last six months. On the other hand, sales and EPS are down 10% and 40% quarter over quarter. ROE is negative 45.61% and the company sports a -10% net profit margin.
Technically, AMD's chart looks terrible. The stock is in a well-defined downtrend with no sign of a reversal. The 50 and 20 day SMAs are nose-diving. The stock has been bouncing along the $4 mark for a month or so.
Seagate (STX) and Western Digital (WDC) both expect the total market for hard drives to be flat to down in the third quarter, indicating PC sales will be weak near-term. This is bad news for AMD. In my last article, I stated that I was putting AMD in the penalty box until the next earnings announcement. I am changing my stance on this. I want to see some type of technical improvement prior to starting a position. The stock recently tested the 20 day SMA, and is trading just under it at this time. If the stock can break through the 20 day SMA and make a run at the 50 day SMA, I may consider starting a position in the name. The stock is a hold for now.
Fortress Investment Group LLC
FIG's EPS is expected to grow by 26.19% next year. The company is trading just 2% below its 52 week high, and has 26% upside potential based on the analysts' consensus mean target price of $5.30. FIG was trading Wednesday for $4.19, up over 3% for the day.
Fundamentally, FIG has some positives. The company has a forward P/E of 7.91. Insider ownership is up 14% over the last six months. EPS is up 102% quarter over quarter. The company pays a dividend with a 4.77% yield.
Technically, the stock has been in a well-defined uptrend since the start of July. The coveted golden cross was just achieved by the stock. This is when the 50 day SMA crosses above the 200 day SMA and is considered extremely bullish.
FIG's assets under management have increased tenfold over the past 10 years. This is a steady performer that pays a 4.77% dividend. With the stock on such a tremendous run recently, I would wait for it to pull back to the 20 day SMA prior to starting a position. The stock is a buy.
Genworth Financial Inc.
GNW's EPS is expected to grow by 91.04% next year. The company is trading 48% below its 52 week high, and has 53% upside potential based on the analysts' consensus mean target price of $7.63. GNW was trading Wednesday for $4.99, up 2% for the day.
Fundamentally, GNW has several positives. GNW trades for one times free cash flow and 16% of book value. The company has a forward P/E of 3.90. Insider ownership is up 33% over the last six months. EPS is up 155% quarter over quarter.
Technically, the stock has been in an uptrend since the start of August. The 200 day SMA is starting to level off, which is positive. The stock is butting up against the 50 day SMA, which should provide strong resistance. If the stock can breach the 50 day SMA and turn resistance into support, the technical state of the stock will improve greatly.
The company reported earnings of $76 million, or 16 cents per share, for the second quarter of 2012. This is up considerably year over year, compared to a net loss of $136 million, or 28 cents per share, for the same period in 2011. This good news may account for the recent run. On the other hand, the Consumer Finance Protection Bureau (CFPB) widened its probe of mortgage-insurance practices to include AIG (AIG) and GNW in addition to PHH Corp. (PHH), according to recent filings.
The news was out on August 6, and doesn't seem to have affected the stock to date. This could be a sign that all the bad news has been priced in. Wait until the stock breaches the 50 day SMA prior to starting a position. The stock is a buy here.
Sirius XM Radio Inc. (SIRI)
SIRI's EPS is expected to grow by 37.50% next year. SIRI is up over 15% in August. The company is trading 1% above its 52 week high, and has 5% potential upside based on the analysts' consensus mean target price of $2.67. SIRI was trading Wednesday for $2.55, up almost 1% for the day.
Fundamentally, SIRI has several positives. SIRI has a forward P/E of 23, and trades for 19 times free cash flow. EPS next year is expected to rise by 37.50%. According to Finviz.com, quarter over quarter sales and EPS are up 13% and 1691%, respectively. SIRI's TTM ROE is 151%, and the company's net profit margin is 107%.
Technically, SIRI has been in a well-defined uptrend since the start of July. The coveted golden cross was just achieved by the stock. This is when the 50 day SMA crosses above the 200 day SMA and is considered extremely bullish. The only downside for the stock is the rate of ascent, yet it has the numbers to back up the move.
Rumors are swirling that SIRI maybe be preparing to do a stock buyback in the near future. Liberty Media (LMCA) edged nearer to taking control of SIRI by increasing its stake to 48% from 46.2%. Last week, Liberty CEO Greg Maffei said he wanted to recoup some the cash his firm has spent on buying SIRI shares, stating that SIRI should borrow money to repurchase stock or pay dividends, and that is exactly what SIRI just did. I posit the stock will rally significantly if the buyback comes to fruition. The stock is a buy, even with the run.
Zynga, Inc. (ZNGA)
ZNGA's EPS is expected to grow by 57.10% next year. The company is trading 81% below its 52 week high, and has 88% potential upside based on the analysts' mean target price of $5.47. ZNGA was trading Wednesday for $3.06, up over 1% for the day.
Fundamentally, ZNGA has a few positives other than EPS, expected to grow next year. The stock is trading for 1.24 times book value, and has a forward P/E of 27.82.
Technically, the stock is the definition of a falling knife. The angle of descent is frightening. The stock has lost 50% of its value in the last month.
ZNGA can't seem to catch a break. Reports have surfaced that companies have seen a "flood of resumes" from ZNGA developers looking to leave. Company employees describe morale as "grim" and "anxious." With employee discontent predating ZNGA's IPO, equity grants might not be enough to prevent a huge brain drain in the face of a crashing stock price.
I am always looking for a great buying opportunity. The problem is ZNGA has three strikes, and it's out in my book. This situation reminds me of the dot com bubble days. Avoid the stock at all costs at this point.
The Bottom Line
Sometimes a bargain is bargain and sometimes it is not. Starting off with stocks projecting solid EPS growth takes some of the downside risk out of the equation; nevertheless, you must always dig deeper to see what the future may hold. Everything is not always as it appears.
Most of these stocks are in the process of rebounding off a bottom, while AMD and ZNGA are still testing their lows. The difference is AMD's fundamentals are much stronger than ZNGA's. That is the difference between one being a hold and the other a sell. If I had to pick one stock out of this list to buy right now, it would be SIRI.
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 a quarter at a time on a weekly basis at a minimum to reduce risk and setting a 5% trailing stop loss to minimize losses even further.