“Earnings Breakout Begins Monday: Act Now”

by Travis Johnson, Stock Gumshoe | October 28, 2010 12:53 pm

Earlier in the week we took a look at a “short” case for a tech stock, so today I thought I’d spend a few minutes tracking down some of Louis Navellier[1]’s favorite picks to buy on what he predicts will be blockbuster earnings in the days ahead.

Navellier has a bunch of both fans and foes in my readership, from what I can tell, and his picks tend to be the kinds of stocks that do make big moves — though sometimes those moves can be down, of course. His system relies on largely quantitative factors like earnings growth and momentum, analyst upgrades, sales momentum, upside earnings surprises, and other measurable things that tend to indicate a stock that’s going to go up on investor enthusiasm — doesn’t seem to work in every kind of market, of course, but he has certainly had his good years, especially when the momentum picks pegged by his grading system lead big market advances.

So what’s he picking this time? Well, he’s got a handful of them, so I won’t spend much time one each but will try to pick out the names and tickers for you so you can make your own decisions.

Navellier is, as he tends to be, pretty optimistic — particularly about technology. And he thinks you can double your money … here’s how he puts it:

“If you didn’t double your money last earnings season, you’re getting a valuable second chance RIGHT NOW….

“There’s a bold new tech revolution headed your way, and there’s simply no stopping it.

“And it’s about to create a windfall not only for a select group of innovative companies but also for those who invest in them now.”

More or less the same kind of thing he’s said before, of course, but he does provide some rationale:

“The global slowdown has forced all companies to get lean and mean—trading workers for technology—and the difference is creating one of the greatest earnings periods in a decade. “

And he provides a few other reasons for this expected boom, too — including low interest rates that make upping production and corporate M&A easier, the big earnings beats by Intel, Qualcomm and Apple, and the low valuation of many tech companies, particularly the larger ones who are in the S&P 500. Throw in that government and corporate IT spending are both on the rise, and the sector looks pretty compelling to our Mr. Navellier.

But of course, “you’ll have to act fast” (otherwise, what’s the rush to subscribe to his newsletter?) He’d like you to sign up for his Emerging Growth[2] newsletter, which will run you about a thousand dollars a year.

The Gumshoe is on the case to sniff out the five stocks that he actually hints about in this ad, though, so let’s move on to that.

Navellier tells us that “Your Best Move” is to …

“Load up on our five top-rated technology juggernauts NOW.”

“Not only are they making money hand over fist NOW, but they are clearly on their way to repeating their past gains in the next 30 to 90 days.”

So what are they? I thought you’d never ask … we’ll look for them in order:

“Tech Breakout No. 1 has me convinced the future has arrived—it manufactures lasers.

“This company is on the cutting edge of this burgeoning field, developing a number of specialized products. And its lasers can be used in fields that range from microelectronics to heavy manufacturing to scientific research.

“With the company doing the majority of its business outside of the U.S., it’s reaping the rewards of a falling U.S. dollar. Its sales jumped 69% in its fiscal third quarter, and it posted a 32% earnings surprise.”

This one is Coherent (COHR)[3], which makes laser, photonics and other optical-type stuff. Roughly a billion dollar company, and they did have 69% sales growth and a 32% earnings surprise last quarter. Their next report comes out November 4, and if it’s any indication of their sector the similarly-sized laser company II-VI (IIVI) reported a blowout earnings beat on Tuesday that sent the shares up about 10% — the other stock that always comes to mind for me in this group is Rofin Sinar (RSTI), which has also not yet reported earnings but, like II-VI, has sometimes been rumored as a takeover candidate and has higher analyst growth expectations relative to their valuation. I don’t know anything about the distinctions between these businesses, just to be clear. Of the three, COHR has the lowest forward PE multiple at about 16 (the other two are around 19), and all have substantial amounts of net cash on their books.

Next!

“Tech Breakout No. 2 is an innovative drugmaker that’s constantly seeking a cheaper way to bring specialty generic pharmaceuticals to patients around the world.

“It’s leading the charge to develop drugs that target Parkinson’s disease, epilepsy and other central nervous system disorders. And no matter how ObamaCare pans out, certain drugs will still be in high demand—especially this company’s nervous system treatments.

“Shares have climbed 37% in the past 2 months. Grab this one before it declares earnings November 2, and I guarantee you’ll catch the next 50% rise or you won’t pay a dime.”

And yes, it’s in quotes so that’s Navellier’s guarantee, not mine — I have no idea whether it will rise when it reports earnings on Tuesday … and, of course, his guarantee means he’ll refund your subscription, not that he’ll make you whole if you lose a bunch of money on his idea.

Oh, and the name of this stock? This must be Impax Laboratories (IPXL)[4] — they do report on November 2, they are working in specialty generics, and the stock has gone up by about 37% from their dip down to roughly $16 back in August. And he has teased them before, I don’t think I ever discussed this one here but I did cover it for the Irregulars way back in April. They actually surprised on the downside last time they reported, but before that had beaten estimates by well over 100% for the previous three quarters, they often have lumpy earnings thanks to the relatively short window for “premium priced” generics.

Here’s what I wrote about Impax back in April, just to give you more of an idea about their business:

“I generally agree with Navellier’s thesis for generic drugmakers — they should do well in a world when more people are getting health insurance, and when costs become a bigger issue … especially with the government as a major buyer (that’s in part because, in my opinion, they’ll never go against the Big Pharma lobby by aggressively bargaining for lower prices for government drug buys … but they can push for generics and get lower prices without making the lobbyists fuss as terribly).

“And of course it’s a good time to be a generic drug maker — there are now a huge number of blockbuster drugs set to go generic, including the ones that scare pharma investors and make companies like Pfizer, Eli Lilly, Merck and many others look so dirt cheap (single-digit PE ratios, dividends[5] well above average … and huge drugs that make up sometimes a quarter or a half of their earnings going off patent in the near future). One of the greatest success stories in the pharmaceutical space, after all, has been the giant generic drugmaker Teva, which makes up something like half of the entire Israeli stock market index.

“But Teva is a huge multinational, with a market cap of well over $50 billion … Impax is tiny by comparison, at just about $1 billion, and, thanks in part to the law of large numbers, growing much faster. And they’ve just recently become profitable on a fairly consistent basis, running in the black for 2008 and 2009 on the back of big revenue boosts after years of losses.

“Their focus has historically been on drug delivery — developing proprietary versions of existing drugs with a slow-release formulation, for example — and they also have a pipeline of proprietary compounds for the central nervous system that includes a couple drugs in phase III trials … but the real moneymaking part of the business is Global Pharmaceuticals, the generic drug maker that I think they merged with about ten years ago. As with most generic drugmakers, the sales performance rises and falls on when they can get generic formulations of popular drugs approved and out the door right as the patent expires (‘new generics’ generally get a brief exclusivity period for being the first to get a generic drug approval on a particular drug, and not surprisingly the drug prices drop more later on if more generic versions get approved and released).”

And along with the lumpiness of those earnings comes some stress[6] about future products and when or whether they’ll be profitable — which is why analysts think they’ll earn about $3 this year, but less than $1.50 next year… so don’t let the trailing PE of 6 fool you into thinking this is a rock-solid bargain. It might be, of course, but if the analysts are right they’re trading at about 15 times next year’s earnings, and the analysts seem similarly pessimistic about the out years, with a prediction that they’ll grow by just 10% a year (as opposed to the last few years of 60% annual growth).

Let’s move on, shall we?

“Tech Breakout No. 3 is unlike any other healthcare[7] stock in our EmergingGrowth portfolio—it’s more about innovative cosmetic products.

“It sells prescription acne products and skin medications to smooth facial wrinkles, and its products are sold directly to dermatologists, podiatrists and plastic surgeons throughout the U.S. and Canada[8].

“Thanks to strong demand for acne and facial care products, the company posted a 23% pop in sales in the second quarter—and a more than 14% earnings surprise. Shares are up 40% in the past four months. Don’t miss the next leg higher.”

According to the machinations of the mighty Thinkolator, this must be Medicis Pharma (MRX) — they did post a 23% revenue increase in the last quarter, and the analyst summary I saw says they beat by 12%, but that certainly can vary by a bit depending on exactly which analysts you average in. So clearly it was expected by analysts, but their earnings did see a big jump last quarter, over 130% higher than the year-ago quarter. Their next earnings release is on Monday.

And yes, they make specialty pharmaceutical products for skin care and acne and the like, about 25 products in all so far. They pay a small dividend, and I know nothing else about the company beyond what I see in the few most recent articles, which mostly focus on the fact that they’re being sued by Genzyme over the patents for some of their wrinkle-filling products. I do like their general business model, since it seems likely that our aging[9] population of vain baby boomers will likely turn to less-expensive injectable treatments like wrinkle fillers or Botox (Medicis competes with Allergan, AGN, the big player in the space with Botox — MRX’s Botox competitor is called Dysport and is apparently also based on botulinum toxin) rather than more expensive plastic surgery[10] — in part because its less invasive, and in part because many of them are significantly less wealthy than they expected to be (thanks, real estate[11] and stock market!)

The list beckons — number four, please!

“Tech Breakout No. 4 is in the business of providing patients, doctors and pharmacists with the information necessary to make good decisions and save money.

“Basically, it provides information management software applications to the pharmaceutical supply industry in the United States. And boy is business booming: Sales grew by 49% year-over-year in the second quarter, while the company also raised yearend guidance.”

Geez, you don’t have to be so stingy with the clues! The big drug distributions companies like McKesson, AmerisourceBergen, Cardinal Health[12] or Henry Schein don’t put up growth numbers anywhere near that level, or at least they haven’t lately … so this is another step down, an IT provider for the pharma supply industry. Who could it be?

So, even the Thinkolator can’t be 100% sure this time, but the best guess is SXC Healthcare (SXCI), which is a technology provider along the pharmaceutical supply chain, with a focus on pharmacy benefit management (PBM) — I’d never heard of these guys before five minutes ago, and I know little about them, but they fit the tease and they did grow sales 49% year over year in the last quarter, so I’ll put this out there as “very likely” the Navellier pick.

Sales and earnings are both growing (though not necessarily at a higher rate each quarter), and they have beaten analyst estimates for four quarters in a row and Navellier eats that stuff up, so there you have it — like most Navellier picks they’re growing nicely, but they’re also priced for growth with a forward PE of about 26. Their next earnings announcement is a week from today, on November 4.

And finally we near the end …

“Tech Breakout No. 5 is the leading Internet publisher of health information for consumers and healthcare professionals. I’m betting you’ve visited its site when you’ve had a sniffle or two before.

“This company provides information on common health ailments, as well as articles and features on staying healthy through diet[13] and exercise. And it’s not surprising its site attracts more than 50 million users.

“Or that it posted earnings of $7.7 million in the second quarter—well above last year’s $11.7 million loss—and a 24% increase in sales. Grab this one before it posts another breakthrough quarter on November 3.”

Well, this is probably the easiest one of the bunch — I’ll let the trusty Thinkolator rest under the desk for a moment and just tell you that this has to be WebMD (WBMD). They release earnings on Wednesday next week, and they did post earnings of $7.7 million in the last quarter after that $11.7 million loss in the prior year’s June quarter.

I’ve heard of and used WebMD, as I suppose most of you have, though I’ll admit that I had never looked at their numbers before — and after laughing at WebMD and most of its competitors during the internet boom (remember DrKoop.com?) I’m frankly shocked that they’ve been profitable for six years now, and have been buying back stock.

The stock has certainly made a name for itself as the biggest for-profit survivor in the medical information space, and their business carries nice big margins thanks to its scalability (their primary revenue drivers are the consumer webmd.com website advertising, and their licensing of medical content to other portals and sites). Health websites are very popular, in part because people like to independently and anonymously (they think) research health information online, especially about embarrassing topics, and in part because there’s such a wealth of information available compared to even a decade ago… and pharmaceutical advertising is a huge driver of almost all media, so I suppose it shouldn’t be a surprise that their ad numbers are up and looking good, though I imagine there must be some concern that the regulators could crack down on the high-profile drug advertising that we are all inundated with nearly every day, and that would probably hurt their revenue.

I don’t know the business well, but there are also lots of smaller and/or nonprofit-connected competitors (mayoclinic.com, etc.), as well as probably plenty of folks trying to build businesses in this area to capitalize on the solid profits and the “good” demographics (each succeeding generation of older, sicker patients is more computer-savvy than the last) — we can probably put Steve Case’s latest project, Revolution Health, in that “building a competitor” category, though they’re pretty big already.

Analysts think that WebMD will make just $1.15 next year, which gives them a steep forward PE ratio in the 40s for what’s expected to be growth of 30% per year in the next several years (and by “expected” we might also mean “guessed” — analysts have had a hard time hitting numbers for WBMD, they’ve been wildly off, on average, for each of the past four quarters — and unlike most Navellier picks, two of those quarters were far worse than expected).

So those are five picks that Navellier thinks should see booming stock performance on strong earnings releases — most of them are in the health care business, which is a bit odd after his focus on more traditional tech stocks in the lead-in of the ad, and all of them release earnings next week. Excited about the prospects for any of ’em, or think that the days of beating and raising are over for now? Let us know with a comment below.

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