Which of These Stocks Is Poised for a Rebound

by: StreetAuthority

By David Sterman

The stock market continues to rack up nice gains. The S&P 500 rose 5.4% in the first quarter (after rising roughly 10% in each of the prior two quarters). If you're keeping score, that first quarter gain was the best for the S&P 500 since 1998. Yet some stocks are missing out on all the fun. I've come across more than a dozen stocks in the S&P 500 that actually fell by 15% -- or more -- in the first quarter.

These companies have suffered their own self-inflicted wounds, but in some cases, they are already on the mend. Let's take a look at which ones are most likely to bounce back in the second quarter and beyond.

The fact that consumer-focused stocks such as RadioShack (NYSE:RSH), Urban Outfitters (NASDAQ:URBN), Target (NYSE:TGT), Best Buy (NYSE:BBY) and Carnival (NYSE:CCL) are likely to fare so poorly at a time of improving employment numbers is a bit curious. But if you dig a little deeper, you can start to see why.

For example, Urban Outfitters delivered weak results for the all-important January quarter, and forward guidance was pretty lousy as well. The company's merchandise simply stopped holding appeal to consumers and that problem will likely take a number of quarters to fix.

Shares of Carnival Cruises are being hit by rising oil prices. Yet some analysts think if oil prices pull back, then newly-cheaper shares would be quite appealing. UBS analysts note that demand for cruises remains strong and see shares rebounding from a current $39 to $52 if oil prices don't surge higher. I'm adding this name to my list of stocks that would benefit from an oil pullback, a list which is led by Ford (NYSE:F) and GM (NYSE:GM). [Read why I think GM has 50% upside.]

Best Buy and RadioShack are two peas in a pod. Both are struggling to generate any sales growth while spending on consumer electronics remains weak. Best Buy has dropped hints about seeking expansion through smaller stores. If it decides to roll out those stores internally, then that would be very bad news for RadioShack, as smaller Best Buy stores would compete directly with RadioShack. Then again, some wonder why Best Buy doesn't simply buy RadioShack, which I profiled in February.

Can monster regain its footing?
Back in early February, I suggested that employment search firm Monster Worldwide (NYSE:MWW) was the perfect post-recession play, especially after shares had been hammered in late January.

Since then, the economy has tacked on more than 400,000 jobs in two months, yet shares are barely above the levels seen when I wrote about the company on Feb. 3. To be sure, we've got a long way to go to call the economy healthy and it will be several years before the job market is robust, but this still looks to be a slow and steady grower as the economy rebounds. Though it may look pricey on a price-to-earnings (P/E) basis (it's trading at 40 times projected 2011 profits), Monster Worldwide shares should be viewed in the context of EBITDA (earnings before interest, taxes, depreciation and amortization), which is far more robust than GAAP income. GAAP income is heavily obscured by non-cash charges, which understates just how profitable the company is. As I noted a few months ago, EBITDA is expected to rise at least 75% in 2011 and hit $300 million by next year. My price target still stands: "Apply a multiple of 10 to that figure, and you arrive at a $24 price target -- roughly 50% above current levels."

A solid big box play
As a consumer, I've always been a fan of Kohl's (NYSE:KSS) and Target. I've also thought very highly of them as an investor. These two retailers have a solid track record in terms of generating impressive returns on investment, consistently seeking to make moves that benefit shareholders.

Target is in my sights right now, simply because investors have been presented with yet another good entry point. Shares rose from $50 in late June to $60 at the end of 2010. Three months later, we are right back at $50, even though the economy now looks far healthier than it did nine months ago. Why the sell-off? Because Target has announced moves that will dampen profits in the near-term but boost them in the long-term.

For starters, Target is spending nearly $2 billion to acquire more than 200 sites from Canadian retailer Zellers. That upfront hit to the balance sheet would have been spread out over a number of years if the retailer had decided to enter the Canadian market on a more gradual basis. The cost to revamp all of those acquired stores will hit profits. Analyst profit forecasts for fiscal (January) 2012 and 2013 have been lowered by 4% to 5% recently, as a result.

In addition, Target is spending heavily to revamp many U.S. stores in order to sell food in most outlets. Food sales bring low margins, but lots of spontaneous retail traffic. That's why management thinks same-store sales can rise 4% to 5% this year, up from 2% in fiscal (January) 2011.

Target may also be set to sell off its credit card operations to pay down some debt. Yet, while the action is being pondered, Target's $10 billion stock-buyback program (which began in 2007) has been put on hold. Some analysts had been forecasting a lower share count for the coming year, and keeping the share count at its current level is also modestly reducing forward earnings per share forecasts. (Target had bought back $2.5 billion worth of stock in 2010 and will likely resume the effort in 2012.)

Management recently outlined the endgame for all these moves. They predict sales will hit $100 billion by 2016 (up from $67 billion in fiscal 2011), while EPS can reach $8 (up from $4). The recent sell-off down to $50 in the context of that long-term growth plan and profit target means investors can once again secure a value price for this well-regarded retailer.

Even though a number of retailers saw their shares trade poorly in the first quarter, the first day of the second quarter (last Friday, April 1) was greeted with a robust employment report. A few more reports like the March jobs report and retails stocks could quickly move back into favor.

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

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