5 Mid-Cap Gainers From Thursday: What to Expect Now

by: Rash Menaria

The following is a list of five major mid-cap gainers from Thursday:



% Gain

Tesla Motors, Inc



Sothebys Holdings



China Yuchai International



Randgold Resources



Pharmasset Inc



Here are some specifics about these stocks and what to expect from them going forward:

Tesla Motors, Inc. (TSLA), a designer and manufacturer of electric vehicles and advanced electric vehicles train components, gained ~17% in trade as Morgan Stanley analyst recommended a buy on it with a target price of $70 (vs. the current price of $27.75). The electric vehicle segment is the future of the automobile industry as higher crude oil prices, along with environmental concerns, are weighing heavily on the combustible vehicles.

The company’s premier ‘S Class’ electric vehicle is expected to hit the road by mid-2012 and the beta prototype is expected to go for safety testing this summer. Furthermore, the investment in the Fremont facility is expected to enable manufacturing to sell hundreds of thousands of units by next decade. The electric vehicles sales are expected to top 5% of the US market and another 5% of the global market by 2020. At current prices, the company trades ~1.3x Price/Sales for 2012e, compared to average Price/sales multiple ~1.5x 2012e of A123 (AONE), Ener1 (NASDAQ:HEV), BYD ( HKG:1211). Given a secular shift towards green technologies, we believe Tesla is the future of the automotive industry and from a long term perspective, suggest investors buy it.

Sotheby's Holdings (BID), an auctioneer, financer & dealer of fine and decorative art, jewelry and collectibles, gained ~6% in trading ahead of the Asian Art sales scheduled next week in Hong Kong. Asian Arts have been showing robust trends in the recent months, driven by significant appreciation in Chinese wealth. Next week’s event is expected to rope in an average of $408 mn (58% above last year’s realization). In the longer term, the company is expected to outgrow its peers like Coach Inc (COH), Collectors Universe (NASDAQ:CLCT), eBay Inc (NASDAQ:EBAY), Movado Group (NYSE:MOV), etc.

The earnings are expected to grow at a long term rate of 16% (vs. the average rate of 13% for its peers) and is trading at a P/E of 16.4x 2011e (vs. the average of 22.7x for its peers). The seasonal best quarters for the company are Q2 and Q4 and any outperformance in these quarters can trigger further appreciation in the stock price.

China Yuchai International (CYD), a manufacturer of a wide array of light-duty, medium-sized and heavy-duty diesel engines for construction equipment, trucks, buses and cars in China, gained ~7% in trading on account of better than expected Q4 results with a phenomenal expansion in gross margin to 30% (vs. a consensus estimate of ~22%) excluding the one time adjustment (income write back). The performance was better than expected because of an increase in unit sales volume and net revenue due to the ongoing product mix shift and higher demand for heavy-duty engines.

The commentary from the company regarding the reversal in the truck inventory piles due to increased consumption gave analysts/investors confidence on the overall growth trend in the trucks segment. The EPS for FY10 stood at $4.58 (y-o-y jump of ~80%) and nearly half of the market capitalization is in cash reserves. The stock is currently trading at a P/E ~5.5x for FY11e ( and ~2.9x ex-cash). We believe the stock has a good upside from the current levels.

Randgold Resources (GOLD), engaged in the mining and exploration of gold mines in West and Central Africa, gained over 10% in trading after it reaffirmed 2011 group production guidance and noted an increase of 5% in attributable resources and reserves in its 20-F filed yesterday. The company is trading at Price/NPV~1.4x, 2012e EV/EBIDTA 9.2x and a P/E of 14.7x which are higher when compared to peers like African Barrick Gold (LON:ABG).

The company is expected to face cost pressures due to higher crude oil prices as it uses diesel generated power at its unit in Mali. Also, the effective tax rate of the company is expected to go up as the tax exoneration period for Loulo ended Nov 2010. Close to 13% of the company’s resources are located in the Ivory Coast, which is undergoing political turmoil. Therefore, it would be safer to exit the counter and move to a relatively safer and undervalued peer ABG, which is available at nearly 50% of Randgold’s valuation.

Pharmasset Inc. (VRUS), a clinical-stage pharmaceutical company focused on viral infections, soared over 10% in yesterday’s trade after it released the interim 12 week data of the Phase 2b PROTON study, investigating PSI-7977. The company noted that PSI-7977 clinical trials (proposed treatment for Hepatitis C) have shown successful trends in Phase II of trials. The number of patients suffering from Hepatitis C is estimated at 3.2 million in the US alone, implying the huge market potential for the drug. The developments were very well received by the investment community. Given the 60% surge in the stock price over the last month, we believe risk rewards are balanced and remain neutral on the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.