Wounded Winners: 8 Strong Stocks Getting Hammered In Q4

by: Alan Brochstein, CFA

As I discussed last month, 2012 is no normal year. With the likelihood of higher capital gains taxes ahead, investors have felt no reason to hang onto the winners as we might normally expect. While late-year sell-offs can be alarming, they may just be an opportunity to jump onto a winner taking a break. With this in mind, using Baseline, I ran the following screen:

  • Market Cap > $500mm
  • QTD Price Return < -20%
  • YTD Price Return > 13%
  • 2-Year Price Return > 20%

The point was to find some stocks that have pulled back sharply but that are in solid uptrends. Here are the 8 stocks that met these criteria:

A few observations before we dig in. First, I have sorted on YTD return, from best to least. Second, notice that all of these companies share a common trait: No net debt. The other columns I included are the 5-year change, the PE and the PE relative to the median over the past decade and, finally, the projected earnings growth for next year. Notice that almost all of these companies are enjoying very strong growth trends.

Cirrus Logic (NASDAQ:CRUS) is a semiconductor company with massive exposure to Apple (NASDAQ:AAPL), which is in a surprisingly distant second place. While CRUS is winning, it has pulled back the most of any of these stocks, trading 37% below its 52-week high. It is the cheapest stock on the list in terms of PE. They are on a March fiscal year, and the 2014 estimates continue to rise. This looks like AAPL sympathy.

Speaking of AAPL, I am not sure I want to jump into this argument. To me, it stands out as a great value, with the pullback most likely technical in nature. I proved myself earlier this year to be not the best timer on this name, though it is lower than when I came out negative from a technical perspective, saying to switch into several other names as I offered 4 reasons to sell the stock.

Next up is Blucora (NASDAQ:BCOR), which is most likely benefiting from a name change. This one used to be Infospace, a dot-com bomb. It's the only stock down over the past five years, but it's up nicely over the past two years and could be a tax-gain harvesting victim. BCOR has gotten into tax preparation software via an acquisition, but it is really a search engine very tightly associated with Google (NASDAQ:GOOG) and Yahoo! (YHOO).

Alexion (NASDAQ:ALXN) was a stud in 2011, leading the NASDAQ, and is having a great follow-on. The biotech company has international rights for a fantastic drug, Soliris. This one is the second-best gainer on the list over the past five years and also looks to be the victim of profit-taking, as earnings estimates are marching ahead.

OSI Systems (OSI) fell on news:

OSI Systems, Inc., a vertically-integrated provider of specialized electronics and services, announced today that on November 9, 2012 Rapiscan Systems, its Security division, was delivered a show cause letter from the U.S. Transportation Security Administration (TSA). The letter, which pertains to a privacy system Rapiscan was developing under contract for the TSA, alleges that Rapiscan did not disclose issues related to the development process in a timely or complete manner. Contrary to some press reports, Rapiscan did not falsify test data; in fact, TSA testimony to Congress today confirms that this was at all times a government controlled test and that Rapiscan could not have manipulated any test data.

Furthermore, the evidence shows that Rapiscan delivered for testing the exact configuration previously disclosed to TSA and which TSA had approved.

"At no time did Rapiscan Systems falsify test data or engage in any fraudulent conduct," OSI Systems President and CEO, Deepak Chopra, commented. "We take the matter very seriously and are fully cooperating with the TSA during this process."

Source: 8-K Filing

The company updated the situation a few days later, supporting its compliance, but this is a big overhang. This story from Bloomberg read a little more negative.

Teradata (NYSE:TDC) grew sales 10% constant currency in Q3. The company, which was spun out of NCR, helps other companies manage, integrate and analyze data. After their report, analysts cut estimates for 2013 by about 2%, but earnings are projected to grow 13% next year, the lowest growth among the 8 stocks.

Have you heard of LSB Industries (NYSE:LXU)? It's one of the smaller names on the list and covered by just three analysts. The company makes chemical products for agricultural, mining and industrial markets and also sells climate control products for commercial and residential uses (geothermal and water source heat pumps, hydronic fan coils, modular geothermal chillers and large custom air handlers). The stock sold off when one of its ammonia plants endured a pipe rupture in November. While growth here is expected to be robust, with EPS rising by 78% in 2013, the estimates have come down sharply. The company is expected to earn about $4 next year, but this is down sharply from the $4.60 expectation as recently as September.

The last stock, Select Comfort (NASDAQ:SCSS) has sold off in sympathy with Tempur-Pedic (NYSE:TPX) from what I can tell. The stock has sold off despite 24% sales growth and 48% EPS growth in Q3. The company lifted guidance for the full-year after the report due to the strength, but the outlook for Q4 was similar to what analysts had been expecting. This stock has one a bit more short-interest than most of the others on the list at over 8% of the float.

We have looked at 8 stocks that have pulled back sharply. While I was able to find a few specific catalysts, I get the feeling that a lot of this is technical. It is the holiday season, perhaps there are some gifts here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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