Top Buy and Sell Ideas Based on Last Week's Biggest Gainers (Part 2)

by: GuruFundPicks

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Buy Motorola Mobility Holdings (MMI): MMI is a manufacturer of wireless handsets, set-top boxes and video distribution systems for home, network and telecom markets. The stock was up 16.5% during the week, and it down 15.4% YTD. The shares were up strongly last week based on comments on Carl Icahn’s 13D filing on Thursday that suggested that the company should explore alternatives regarding its patent portfolio to enhance shareholder value. The filing further went on to state that it believes that MMI’s patent portfolio, which is substantially larger than Nortel Networks’ and includes numerous patents concerning 4G technologies, has significant value. In addition, the filing stated that there may be multiple ways to realize such value given the current heightened market demand for intellectual property in the mobile communications industry, and that Icahn intends to have further discussion with MMI regarding this matter.

This filing was inspired based on the recent bidding war between Apple Inc. (AAPL), Research In Motion (RIMM) and Microsoft (MSFT) over Nortel’s telecom patents that were valued at $4.5 billion. MMI is Icahn’s largest portfolio position, holding $1.37 billion or 22.1% of MMI stock. Previously, Icahn forced Motorola Holdings Inc. to spin-off MMI, so the statement in this filing is particularly significant. Further, at under-$7 billion market cap, MMI looked particularly cheap, if the value of its patents alone exceeded $4.5 billion. As a result, investors reacted to the positive development, driving the stock higher.

MMI is an attractive buy as it trades at forward 15 price-to-earnings (P/E) based on fiscal year 2012 earnings, and it is projected to grow revenue and margins strongly in the near term from $11.46 billion in revenue and 4c in earnings in 2010 to projected $13.35 billion and 74c in 2011 and $14.93 billion and $1.59 in 2012. Also, Icahn is persistent and has a high success rate in pressuring management to execute on his vision. Furthermore, of the 40 analysts that cover the stock, 20 rate it at buy/strong buy, 15 rate it at hold and five rate it at underperform. We would be buyers here based on valuation, and also based on Icahn’s actions in trying to maximize his investment value in MMI.

Buy Skyworks Solutions Inc. (SWKS): SWKS is the industry’s leading wireless semiconductor company focused on radio frequency (NYSE:RF) and semiconductor solutions for mobile communications applications. These RF semiconductors are essential for 3G and 4G platforms, and the company continues to benefit from the ongoing explosive growth in the smartphone market, a trend that is likely to last many years as smartphones gain market share worldwide. The stock was up 19.0% during the week, and it is down 5.8% YTD.

SWKS trades at a 15 P/E on a TTM basis and at a forward 13 P/E, about mid-range based on its historic range. Meanwhile, earnings have increased from 69c in 2009 to $1.26 in 2010 and are projected to increase to $1.82 in 2011, at a 38% compounded growth rate. The company reported its June 2011 quarter report on Thursday after-close, beating both revenue and earnings estimates at $356 million and 49c versus estimates of $347 million and 46c, and it guided up September 2011 quarter revenues to $400 million versus the $373 million estimate. We would be buyers here as the company trades at an attractive valuation, at a discount to its growth rate, and it operates in a very attractive mobile connectivity industry that is growing explosively.

Medco Health Solutions (MHS): MHS provides pharmacy benefit management services to employers, health plans, unions, government agencies and individuals. The stock is up 22.1% during the week, and it is up 7.7% YTD. The shares gapped up Thursday on news that MHS and Express Scripts (ESRX) signed a definitive merger agreement for MHS to be merged into ESRX.

Buy Agfeed Industries Inc. (FEED): FEED is engaged in the animal nutrition and commercial hog production business primarily in China. The stock rose 23.8% during the week, and it is down 38.1% YTD. This is back-to-back over a 20.5% increase in the prior week ending July 15th.

FEED trades at a forward 4-5 P/E while revenues are up strongly, up to $93 million in the latest reported March 2011 quarter which is a 100% increase year-over-year. Unlike other China small-cap companies plagued about fraud allegations regarding even the existence of their basic operations, FEED has a U.S. subsidiary M2P2 LLP that is a key supplier to Hormel Foods Co. (NYSE:HRL) and is one of the largest pork producers in the U.S., with an annual production capacity of 1.3 million hogs. Only one analyst, Rodman & Renshaw, currently covers FEED; it has a Strong Buy rating and a $3.50 target on the stock, well above current price in the $1.80s. We first recommended buying FEED last week in the $1.40s, and reiterate the buy, but with the price up significantly, we would recommend buying in stages and on dips, taking advantage of any temporary weakness in the stock.

Mips Technologies Inc. (MIPS): MIPS is a provider of industry-standard processor architectures and cores that power various home entertainment, communications, networking, and portable multimedia products. The stock is up 18.8% during the week, and it is down 47.5% YTD. The strength last week is on account of take-over chatter regarding a suitor for the company. MIPS trades at forward 18 P/E, while earnings are projected to flat-line from 38c in 2010 to projected 47c in 2011 and 43c in 2012. Analysts have put a mean price target of $11, with a high of $14, well above the current price in the $7.90s; and of the five analysts that cover the company, four rate it buy/strong buy and one rates it at sell.

Walter Energy Inc. (WLT): WLT produces hard coking coal from underground mines for by the steel industry. The stock was up 18.7% during the week, and it is up 3.0% YTD. The stock was up last week on account of takeover speculation that surfaced on Wednesday.

Nalco Holdings Co. (NYSE:NLC): NLC provides water treatment, process improvement and energy services to clients located in over 150 countries. The stock is up 27.5% during the week, and it is up 14.9% YTD. The stock was up last week on account of it being acquired by Ecolab Inc. (ECL) last Wednesday.

Table (click to enlarge):

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and The information and data is believed to be accurate, but no guarantees or representations are made.

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

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.