Everyone loves a bit of “what you should do next year” advice at this time of the year — the magazines are full of it, the newspapers issue predictions, and all the newsletter folks swirl their tea leaves around and proclaim that it’s going to be “The Year of X!”
No, not X as in US Steel — sorry. Think algebra … X = ?
And the ? in this case is answered by Louis Navellier, who tells us that his quantitative system is flagging 257 stocks to sell, including five that he calls out for special attention … and that there are five small caps that he thinks you should buy before Christmas to get ready for a great 2012.
The ones you should sell, per Navellier, are:
- “AU Optronics (AUO) gets F’s across the board from my stock rating system—demand for flat-panel displays may be booming, but AUO is managing to lose money making them
- Ruby Tuesday’s (RT) latest earnings show that casual restaurants like Red Lobster and Olive Garden may look crowded, but their price-cutting to fill the seats is hammering profits.
- Schlumberger (SLB) is an outlier in the exploding field of energy. It’s going nowhere fast, thanks to big capital expenditures, and low operating cash flow.
- Dr. Reddy’s Laboratories (RDY) has dropped 25% in the last year, thanks to tough competition in its generic drug business, plus the ever-present threat of big class-action lawsuits.
- Fibria Celulose S.A. (FBR) is a Brazilian timber company feeling the bite of the worldwide economic slowdown—it’s dropped 56% in 2012, with more to come.”
I don’t own any of those, so you can go ahead and sell them if you want to — no skin off my nose.
But what are the ones that Louis thinks you should buy? Well, those he doesn’t exactly hand out like Halloween candy … he wants you to subscribe first (yes, he’s still offering the “special” quarterly offering — instead of the “regular” price of $995, pay 20% more for the privilege of paying in installments!)
And we aren’t going to do that — at least, not just to find out about the five names he’s teasing … so let’s turn on the Thinkolator and feed it some of the clues, shall we? Perhaps we can ID a couple of these fellas for you for the low, low price of a few minutes of your time.
“Small-Cap Winner #1 is our top health-care company.
“Buy it now and sell Qiagen (QGEN), Teva Pharmaceutical (TEVA) and ResMed (RMD).
“Up 88% in 2011, this little dynamo is just getting started. Sales boomed 64% last quarter, and earnings soared 158%, thanks to big new sales for this company’s meal tickets: leading therapies for both OCD and narcolepsy.
“With a P/E of just 16 and a market cap one-twentieth the size of giants like LLY and ABT, this company is a steal. A new deal to acquire the shares of an Irish drugmaker with promising therapies in the areas of the central nervous system and women’s health should boost them into their next mega-growth phase.”
OK, them’s fightin’ words! I own Teva (TEVA), so I’ll shed a small tear if you decide to sell those shares — especially after they announced that they’d be pursuing a dividend growth policy and buying back $3 billion worth of stock in the near future. And making a lot of money next year — the forward PE on their guidance for 2012 earnings is about 7. On second thought, if you want to sell … maybe I’ll buy your TEVA shares (I know, I know — I can’t do anything with this stock for at least three days, those are the Stock Gumshoe trading restrictions).
But you aren’t investing your precious pre-holiday moments of time to find out what I like — what does Navellier like? Thinkolator sez that this one is … Jazz Pharmaceuticals (JAZZ)
I don’t know much about this one — they also look pretty cheap, they’re a midsize pharma company (market cap around $1.5 billion, forward PE of about 11), and they did have a nice growth spurt in the last quarter — revenues were up 64%, and earnings were up an even more impressive 145% year over year. Analysts think they’re going to keep that up, with revenue growth topping 70% in 2012, so if that’s the case you can definitely make a valuation case for JAZZ at a bargain basement Price/Earnings/Growth ratio of 0.35 … which must mean that someone’s worried about how long that growth will last. I haven’t checked into any of their FDA pipeline, patent issues, or anything else, though it’s worth noting that KKR, the buyout shop, has a large 20%+ holding in JAZZ (they backed the company as a startup almost a decade ago, so it’s not necessarily an indication that they’re going to do anything with that holding in the near term).
So there’s one — can’t complain about their valuation vis a vis their expected growth rate, though it does look cheap enough that I expect there’s probably some kind of skeleton lurking under the bed … if you know what it is, feel free to shout it out with a comment below.
We, however, have other fish to fry. Or skeletons to find. Whatever … on to number two!
“Small-Cap Winner #2 is the perfect way for you to profit from the explosion in domestic fuel production.
“Sell all your shares in Murphy Oil (MUR), Ultra Petroleum (UPL) and Encana (ECA) to make room in your portfolio.
“It’s no secret that U.S. energy supply is booming, thanks to new fields in shale formations and other difficult locations. Over the next 5 years, the U.S. may be a net energy exporter, something many forecast would never happen in our lifetime!
“That’s music to the ears of our favorite petroleum refiner, because it is a fast mover—much more nimble than big players like Valero and Tesoro.
“The kicker for this company is its production of nitrogen fertilizer products on the side—a nice source of profits and a nifty way to insulate earnings from roller-coaster oil and refining prices.
“This stock is up 39% in the last year. Sales rose 31% in the third quarter, and earnings rocketed 371% higher, blowing away analysts’ estimates.
“You have a green light from me to pick up shares below $20, but you must move fast. This story is only getting better.”
This one, sez the Thinkolator, is CVR Energy (CVI), which is a refiner and fertilizer producer — they also recently spun out some of the fertilizer business into an MLP called CVR Partners (UAN) that has gotten a fair amount of attention (and a yield near 10%), but Louis is talking about the parent here. It’s again a fairly mid-size company (or a “large small cap” if you prefer), with a market cap around $1.6 billion and — like all of the refiners — a very cheap valuation. CVI trades at a forward and trailing PE around 4 or 5, which is more or less where competitors like Western Refining (WNR), Valero (VLO) and Tesoro (TSO) are trading.
So on the quick and dirty look at the valuation and their business, if you like refining and fertilizer there’s no reason not to look at CVR — they are probably in a pretty good location, with Kansas and Oklahoma refining and distribution assets that I presume can benefit from relatively inexpensive domestic crude inputs (ie, the lingering difference between WTI Crude and Brent Crude), but I haven’t read up on the details to tell you if that plays out in their numbers. Interesting assets, nice to be a GP to a MLP as well and have some fertilizer exposure, and like all refiners it’s currently inexpensive and will probably trade largely on the widening or shrinking of crack spreads (the difference between the price of crude oil and the price of refined products like gasoline).
But we’re keeping it quick here, so I’ll let you go forth and researchify on your own — let us know if CVR Energy is your cup of Texas (or Kansas) Tea, and we’ll move on to the next one …
“Small-Cap Winner #3 is our top “second chance” stock. We already cashed in once on it, to the tune of 1,125% profits, and it’s on the move again.
“Sell Ruby Tuesday (TR), Molson Coors Brewing (TAP) and Avon Products (AVP) now to free up cash.
“Although it’s not quite the stock-market darling it once was, this specialty beverage company is still clicking on all cylinders. Earnings, up 24%, same for sales. Not bad in an era when consumers are supposed to be in hiding.
“But the real story is what’s ahead: international expansion into Europe, Asia and Latin America. A new electrolyte-infused energy drink. Three new flavors that are getting high marks in testing.
“And let’s not forget serious speculation of a takeover bid from one of the big boys looking to round out their product line. Although the stock has popped 83% this year, it’s still small enough for one of them to gobble our stock up.”
That one, according to the mighty cogitations of the Thinkolator, is Hansen Natural (HANS), the invesetor darling that blossomed over a decade or so from a little natural soda making penny stock into a stock market goliath. Or Monster, I should say, since it’s the Monster energy drink that got them to where they are today. And yes, the stock did almost double again this year, and earnings and revenue were both up 24% in the last quarter — which is pretty weak compared to their historical boom years, but awfully good for an $8 billion company.
It is still small enough to be taken over by a giant like Pepsi or Coke, but it’s a little hard to see them doing that at this kind of valuation — possible, sure, but it would catch me by surprise. Will they keep growing? They’re still priced for growth, the forward PE is 26 and analysts think they’ll only grow earnings by 20% next year — that’s a LOT more growth than the big beverage guys will get next year, but it’s tepid by Hansen standards, so it’s anyone’s guess how investors will treat the stock next year. Haven’t ever owned this one, it has always seemed to expensive to me and I’ve therefore missed out on some great returns (and a few jaw-dropping flops of the stock price — as you often get when momentum stocks disappoint). And I think Monster is almost, but not quite, as disgusting and undrinkable as Red Bull, so I probably don’t understand the company or their target market very well — if you’re a fan or foe of HANS, shout out your thoughts with a comment below.
More? You bet we’ve got more!
“Small-Cap Winner #4 is perfectly positioned to capitalize on exciting new video game technologies like the Xbox 360 Kinect.
“Sell entertainment stocks like Netflix (NFLX), Rovi (ROVI) and Dolby Labs (DLB) before it’s too late.
“With four new games for the revolutionary motion-sensor platform Kinect, this company is in the catbird’s seat this holiday season. Avid game players are clamoring for the hot new games our top videogame developer has just released.
“These games aren’t violent shoot-em-ups… they’re family-friendly and fun titles that get you dancing, twisting and burning calories, so they’re perfect for parties and even Mom and Dad.
“Analysts are predicting 14% sales growth and 200% earnings growth, but don’t be surprised if they’re wrong—the company has beaten earnings estimates by a whopping 82% on average the last 3 quarters!
“Despite rising a smoking-hot 262% in 2011, this stock still sells for less than $3 a share. But it won’t for long.”
This one is a much, much smaller stock — Majesco Entertainment (COOL), a video game publisher with a market cap of just about $100 million (and $20 million of that is in cash). They have clobbered analyst estimates by more than 80% each quarter over the last three reported quarters, and trade at a low forward PE of just 6 … and for less than 1X their trailing sales, which is pretty low for a publisher with decent profit margins (near 10%). Analysts are predicting that they’ll increase earnings by about 10% next year, but there are only three analysts on this stock and the only thing you can clearly tell from their estimates is that they aren’t very good at estimating COOL’s earnings quarter to quarter. Not that I blame ’em, it’s a tiny company and is very much driven by game popularity — and it doesn’t take much of a hit or a bust from a new product to move the needle surprisingly quickly for such a small firm. I have no idea if their Kinect games will be huge hits this year or not, they do sell “family friendly” stuff — their Kinect offerings that they have high hopes for are the latest Chipmunks movie tie in, a Zumba game, Twister, and a Hulk Hogan wrestling game.
Gonna make you rich? You decide. Do note that there’s always plenty of fearful chatter about whether the console game publishers can survive in the Facebook/iPhone world, so although you’ll see a lot more of that chatter as it pertains to Electronic Arts (EA) and Activision Blizzard (ATVI), the same basic trends and fears probably apply to COOL as well. There may be a place for a small upstart like COOL with niche offerings and occasional hits, but it’s also becoming more of a hit-driven business where ATVI spends hundreds of millions of dollars developing their latest Call of Duty iterations, so COOL is a pretty small operator in a land of giants. Which worries me less than the hit-driven ATVI and EA that have had trouble turning their blockbuster hits into stock market performance, actually. So if you’ve been watching your neighborhood teenagers and they seem obsessed with the Chipwrecked video game or are getting into Kinect Zumba, well, I bet COOL will do great. Let us know.
One more? Sure, you deserve it! You’ve been very good this year, don’t think we haven’t been watching.
“Small-Cap Winner #5 gives you true ‘sleep well at night’ peace of mind.
“Buy yourself some now, and sell Urban Outfitters (URBN), Carnival (CCL) and Sears Holdings (SHLD) now.
“Whoever thought you could revolutionize how we sleep?
“This company’s founders, that’s who. For decades, this innovator has taken the special foam technology that NASA developed and found new ways to help us sleep better through new beds, mattresses, pillows and more.
“With the top brand name in the field, it’s no wonder the company churns out regular growth of 30%-40% per quarter in both revenues and earnings. And you’ll definitely sleep better with this stock in your portfolio—up a sharp 42% in only 12 months.
“Millions of new customers worldwide are entering the middle class and looking forward to a better night’s sleep. This company will make it possible.”
So we close it out with one that’s pretty easy — even with the Thinkolator working at half speed and under the influence of Seasonal Affective Disorder, we can tell you that this is … Tempur-Pedic (TPX).
Remember when Tempurpedic (astronaut foam) and Select Comfort (sleep number beds) were slugging it out in the surprisingly hot “selling high tech mattresses from mall kiosks” business and becoming exciting small cap stocks a few years ago? Well, Tempur-pedic has done better so far, though both have turned into billion dollar+ companies and have done very well over the last year or two (going back further, TPX has handily clobbered SCSS, thanks largely to the fact that they didn’t fall as far in 2009, when SCSS came close to bankruptcy).
Other than that, I can tel you that I like the memory foam pillow but I hate the memory foam mattress. In case you’re picking out last-minute gifts for your friendly neighborhood Gumshoe. TPX trades at a small premium to the overall market (trailing PE of about 17, forward PE of 13), has a manageable amount of debt, and is projected to grow earnings in the high teens, so that ain’t bad. I tend to still think of this one as a fad, myself, but I’m probably wrong — they’ve become a $3.5 billion company now, so they apparently are doing something right even though there are plenty of competitors now offering similar-looking products. If you like sleeping on those crazy body-molding foam mattresses, or think one of the newfangled mattress companies like TPX or SCSS is going to make us rich, well, let us know with a comment below.
Phew. So there you have it — a bunch of stocks that Navellier thinks you should sell, and five that he’s teasing us with that he thinks you should buy before Christmas Day … do you think he’s right? Got a favorite in that list? Register your thoughts below, and we’ll keep working to compile a few other “what to buy in 2012” idea lists in the days ahead before Stock Gumshoe shuts down for the Christmas break.
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