I get a lot of inquires as to how I actually perform regarding stock picking. This gave me the idea for this article. We will take a look back and review one of my articles from early July. All five of the stocks covered in the previous article are up 27% on average since early July. Sprint (S) is up the most at a 50% gain, while Frontier (FTR) is up the least with a 16% gain.
Reviewing picks is a part of my usual modus operandi. By going back and seeing why you were right regarding a stock can better prepare you to recognize the next opportunity. We can look back and identify what catalyst really produced results, take this information, look for similar scenarios, and attempt to replicate the results. The following is an analysis of five picks then and now.
The stocks selected for review had shares trading well below their consensus estimates and 52 week highs. The companies were trading on average 40% below their 52 week highs and had 28% upside potential based on analysts' estimates. This fact alone carries little weight, but it's a good starting point when looking for undervalued stocks.
Additionally, the five stocks had positive fundamentals and share prices trading at or below $5 at the time of my recommendation. 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. Finally, these are stocks with market caps of $2 billion or greater.
In the following sections we will perform a review of the fundamental and technical state of each company to determine if this is the right time to stay with the position or sell out. The following table depicts summary statistics and Thursday's performance for the stocks. The following charts are provided by Finviz.com.
Brocade Communications Systems, Inc. (BRCD)
Brocade was trading for $4.93 the day of my recommendation in an article published on July 6th. The company is now trading up 25% at $6.17.
Brocade is currently trading at its 52 week high and 1% above the consensus mean target price of $6.09 for the company. Brocade closed Thursday at $6.17, up nearly 2% for the day.
Brocade has some fundamental positives. The company is trading for 1.3 times book value and has a forward PE of $10.27. Brocade is trading for 5.44 times free cash flow. EPS is up tremendously quarter over quarter.
Cantor Fitzgerald recently made a bullish call on the enterprise storage space, upgrading Brocade to a Buy. Cantor thinks Brocade's plans to monetize part of its oversized San Jose campus will strengthen its balance sheet.
The stock has performed well since the start of June posting higher highs and higher lows. The stock has rocketed up sharply over the last two months. It has broken above analysts' estimates and made a new 52 week high. I think this is the start of a longer run. The storage space is on fire due to the incredible growth of data being transmitted. I would wait for a pullback of 5 to 10% prior to starting a position and stick with it if I was already in.
Frontier Communications Corporation
Frontier was trading for $4.01 the day of my recommendation. The company is now trading up 16% at $4.64.
The company is trading 28% below its 52 week high and has 8% upside potential based on consensus mean target price of $5.01 for the company. Frontier closed Thursday at $4.65, up almost 2% for the day.
Frontier has some fundamental positives. The company is trading at 1.1 times book value, 91% of sales and has a forward PE of $17.20. Frontier pays a dividend with an 8.61% yield.
I have been pounding the table on FTR since the shares were at $3. The shares are still trading at multi-decade lows, insiders are buying and the stock was recently upgraded. The stock has been in a well-defined uptrend since the start of May. The stock has been consolidating at this level for the past month. Frontier is a buy here.
Nokia Corporation (NOK)
Nokia was trading for $2.02 the day of my recommendation to sell. The company is now trading up 22% at $2.46. I got this one wrong.
The company is trading 64% below its 52 week high and has 3% upside based on a consensus mean target price of $2.53 for the company. Nokia was trading Thursday for $2.46, up over 3% for the day.
Fundamentally, Nokia has some positives. Nokia is trading for approximately 80% of book value and only 22% of sales. EPS next year is expected to rise by 85%. Nokia pays a dividend with a 10.27% yield, although the company is currently not profitable which may mean the dividends are unsustainable.
Nokia's stock has been crushed. Analysts have severely dropped the target price for the stock. The win by Apple (AAPL) over Samsung (OTC:SSNLF) regarding handsets seems to have opened the door for Nokia. With Microsoft (MSFT) backing Nokia and Apple putting the proverbial screws to Samsung, things just got interesting for this stock. It is a speculative call, but I say Nokia may pull out of this nose dive. The stock is a buy.
Sprint Nextel Corp.
Sprint was trading for $3.31 the day of my recommendation. The company is now trading up 50% at $4.96.
The company is trading 10% below its 52 week high and 2% above the consensus mean target price of $4.90 for the company. Sprint was trading Thursday for $4.96, up slightly for the day.
Fundamentally, Sprint has some positives. Sprint is trading for 1.6 times book value and only 43% of sales. EPS next year is expected to rise by 43%.
Sprint says its 4G LTE network went live in five cities on July 15. Separately, Tero Kuittinen argues T-Mobile's woes could work to Sprint's benefit. These developments may be major catalysts for the stock. The stock has been on a tear since mid-April. I see any pullback as a buying opportunity. Right now, the stock looks a little frothy at this level. I took profits and am looking for a pullback to the 50 day sma to get back in.
SIRIUS XM Radio Inc. (SIRI)
SIRIUS was trading for $2.09 the day of my recommendation. The company is now trading up 22% at $2.54.
The company is trading 4% below its 52 week high and has 10% upside potential based on consensus mean target price of $2.80 for the company. SIRIUS was trading Thursday for $2.54, up nearly 1% for the day.
Fundamentally, SIRIUS has some positives. SIRIUS has a forward P/E of 23 and trades for 19 times free cash flow. EPS for the next five years is expected to rise by 25%. Quarter over quarter EPS is up tremendously. Siri's TTM ROE is 151% and the company's net profit margin is 107%.
I am long SIRIUS. The stock just achieved the golden cross where the 50 day sma crosses above the 200 day sma. This is considered extremely bullish. On top of that profits are up huge and the company's cash flow continues to increase. A stock buyback and/or a dividend is in the cards. The stock is a buy here.
The Bottom Line
All eyes will be on the jobs report due out Friday morning. Whatever the number is, it appears to be a win-win scenario for stocks. Either we get a strong number and the market moves higher or we get a weak number which gives the Fed carte blanche to employ another round of QE. With the rest of the world engaging in QE and dropping rates, the door is wide open for the Fed.
The macro environment is favorable for stocks. Furthermore, we are entering a seasonally favorable period for the tech sector in general. The fourth quarter is traditionally bullish for tech stocks. This is the perfect time to start a position in these up and coming names. Wait for a pullback in Sprint and Brocade prior to starting a position, but I wouldn't sell if I was currently in the stock.
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. You can also set a 5% trailing stop loss order if you wish to minimize losses even further.