Sometimes Wall Street "dogs" turn into "darlings," and buying a beaten-down stock that is about to see a momentum shift to the upside can be very rewarding. Just look at how quickly stocks can turn in the tech sector. A few weeks ago, Hewlett Packard (NYSE:HPQ) was trading near 52-week lows, and now, it is the best performing S&P 500 stock in the first weeks of 2013. Dell (NASDAQ:DELL) was also being dumped by investors, and now, it is surging on news of a possible takeover. These are examples of why it can pay to go bottom-fishing in beaten-down tech stocks. With that in mind, here are two cheap tech stocks that underperformed in 2012 and could be primed to surge higher in 2013:
Unilife Corp. (NASDAQ:UNIS) could become a very interesting medical technology stock in 2013, for a number of reasons. While the stock appears to have suffered from year-end tax loss selling in late 2012, there are some upcoming catalysts for this company that could indicate a real turning point is at hand. First of all, after years of development, Unilife seems poised to finally commercialize its lead product, the Unifill syringe, which has a glass barrel and a fully retractable needle. This unique design makes it a drug storage, safety, and delivery device. This product has attracted interest by some major pharmaceutical companies, including Sanofi-Aventis (NYSE:SNY), which has a partnership deal with Unilife that has provided about $40 million to the company since 2008. That is significant, because Sanofi is the world's largest buyer of pre-filled syringes.
Some analysts see major revenue potential from this device, and one analyst at Jefferies & Company believes Unilife could reach $500 million in sales by 2016, and jump even further to $670 million in 2017. Analysts at other firms are also seeing major upside potential for Unilife shares, and have recently upgraded the stock. On December 17, Cantor Fitzgerald initiated coverage on the stock with a buy rating and set a $7.50 price target. Ladenburg Thalmann analysts also upgraded the stock to a buy rating just weeks before. The number of analysts turning bullish just before 2013 could be based on the belief that the positive headlines and revenues that will come with commercializing Unifill will be a game-changer for the stock.
In another positive development, Unilife recently announced that a U.S.-based pharmaceutical company has commenced evaluation studies for the Unifill syringe. In response, Unilife CEO Alan Shortall stated:
"This customer is just one of many pharmaceutical companies that are selecting our devices to enable or enhance the delivery and commercial success of their injectable therapies. As I stated during our recent Annual General Meeting, there is a tremendous amount of business activity now occurring across our commercial pipeline. In the last month alone, we have held meetings with senior executives from more than a dozen pharmaceutical companies as part of advanced, ongoing discussions that relate to every device platform across our portfolio. We look forward to announcing the formalization of many of these commercial relationships in the weeks and months ahead..."
Management appears solidly aligned with shareholders, as a number of top executives have a meaningful position in the stock. For example, Unilife CEO Alan Shortall owns nearly 5.5 million shares, and some well known funds are also heavily invested. JPMorgan Chase (NYSE:JPM) owns about 6.1 million shares, which represents a stake of roughly 7.1% in the company.
According to Shortsqueeze.com, about 10 million shares are short. With average daily volume of about 290,000 shares, the short interest is equivalent to about 35 days worth of trading volume. That means this stock has significant short-squeeze potential. Shorts have been right to go short from much higher levels and before the company was close to commercializing the product, but with Unilife at a potential turning point for revenue growth, with tax loss selling over and with multiple analysts getting back on board with bullish views, it seems that the shorts might now have more to lose than gain.
Unilife has a solid balance sheet, with about $18.5 million in cash and around $27.6 million in debt. With a current market capitalization of roughly $200 million, it also has a strong debt to equity ratio. It also has the ongoing partnership agreement with Sanofi-Aventis, which runs through June 2014 with an option to extend it for another 10 years. With purchase orders expected to arrive in 2013, and since purchase order funding is relatively easy to come by if needed, this company appears to be financially well-positioned, especially considering the major growth potential that multiple analysts expect in the next couple of years.
While this stock has been a disappointment for some shareholders in the past few months, that is creating a potential opportunity. It often takes more time and money that anyone expects to commercialize a major new medical device, and buying this beaten-down stock when many shareholders may have lost interest or given up on it could be rewarding. The stock is oversold, and it appears due for a rebound in the short term. In the longer term, the downside risks of development costs seem minimal now, but the company needs to successfully execute its marketing plans in order to reach the full sales potential that Unifill offers. If management does not perform, this stock could languish. However, Unilife shares recently put in a bullish double bottom, and the heavy short interest could be a major upside catalyst.
This company could even be an attractive takeover target for a major medical device maker due to its low valuation, and also because so many pharmaceutical companies have expressed interest in its products. With analysts predicting this stock could more than double to $7.50 per share, and with significant revenue growth possible in 2013, buying this beaten-down stock might finally make sense.
Zynga, Inc. (NASDAQ:ZNGA) shares seem to have hit bottom during the tax loss selling season, and recently, the stock is showing signs of strength. While some shorts and investors seem to view this developer of social network games like Farmville and Mafia Wars as a fad, this industry is still in its infancy, and it's way too early to write this company off. While the past couple of quarters have not been exciting for shareholders, at just over $2, this stock looks to be a low-risk value play with major growth potential in the future.
Zynga has a very strong balance sheet, with roughly $1.32 billion in cash and just around $100 million in debt. That level of cash is equivalent to about $1.69 per share. This gives the company significant resources to develop new games or buy other companies.
Zynga is starting to use that cash to create shareholder value. Not long ago, it announced a $200 million share buyback. It also is moving quickly to be positioned for real money online gambling, and this could be a massive opportunity in the future. Zynga recently filed for a real-money gaming license in Nevada, which means it could have big plans for online gambling, which some expect will be legalized in the future. It is also moving into online gambling in international markets, as it now has gaming websites Zynga Plus Poker and Zynga Plus Casino in the United Kingdom. Both sites are projected to go live in early 2013.
Another plus is that Zynga has announced cost-cutting measures that could improve future results with savings of around $15 to $20 million annually. These savings could add up to about 3 cents per share to the bottom line in the future. The company expects to achieve this by laying off about 150 employees, and by limiting marketing and technology expenses. With a super-strong balance sheet, and the stock trading just slightly above book value, the biggest downside risk might be dependent on how well management executes. If better financial results are not forthcoming, the stock could languish. However, investor sentiment seems to be turning more positive on Zynga, and with more positive headlines about online gambling possibly coming in early 2013, the stock seems too cheap to pass up. Investment analysts at Needham have a buy rating and a $4 price target on the shares. That would be a gain of roughly 60% from current levels.
Disclosure: I am long ZNGA, and I may initiate a position in UNIS in 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.