The rising market during the past several months has helped boost virtually every portfolio. Yet without the wind at your back, marking steady gains becomes that much more challenging. Indeed, April represents the first weak month for the market in quite some time. With the exception of a very tiny pullback in November, the market had been rallying for much of the past six months.
Yet market pullbacks bring fresh opportunity because some individual stocks can take really deep hits if they don't have a rising broader market to support them. Consider this item: 16 stocks fell at least 30% in April (among companies with at least $250 million in market value). That's the largest group since September.
To be sure, most of these plunging stocks deserve the lambasting they've gotten. Netflix (Nasdaq: NFLX), for example, looked vastly overvalued when the month began. After a recent sharp pullback, shares still look overvalued, as I've noted in this article.
And it should be no surprise to see Groupon (nasdaq: GRPN) and Zynga (Nasdaq: ZNGA) on this list. These companies were so richly valued this past winter that they had only way to go -- down.
For that matter, the ongoing troubles at Clearwire (Nasdaq: CLWR) should have never led to a temporary rebound in the first place. Though I initially suggested shorting this wireless services provider when it traded above $6 back in the summer of 2010, my suggestion this past October to keep shorting the stock has been more challenging. Shares subsequently rebounded but are falling anew and could still head well lower as cash balances evaporate.
Yet the batch of April losers also brings potential opportunities. As an example, the sharp drop in Halozyme Therapeutics (Nasdaq: HALO), appears overdone, as I noted in this article.
Two other stocks in the table above merit your research, as they could make solid rebound candidates.
1. Allscripts Healthcare (Nasdaq: MDRX)
Back in 2010, this company acquired Eclypsis, creating the health care industry's broadest platform for electronic medical records. In the face of looming changes that would eventually compel doctors and hospitals to put away the pen and paper and create fully digital patient records, this stock should be a home run right now. Instead, this will likely go down as one of the most poorly executed mergers of all time.
Every quarter brought a fresh excuse as to why the two companies' disparate platforms were taking a long-time to merge. Clashes at the newly joined-at-the-hip respective management teams didn't help. Meanwhile, rivals such as Cerner (Nasdaq: CERN) quietly stepped in and poached customers.
If you did the math a few years ago, then the combined entity looked like it might be able to generate $1.50 in earnings per share (EPS) or more by now. Instead, the company will be lucky to make half that much.
You can only imagine the boardroom infighting when Allscripts announced first quarter EPS of $0.12, half the already-lowered forecast that had been in place. Several executives and board members abandoned ship, and the company's new Chairman, Dennis Chookaszain, must figure out how to salvage the mess.
Value investors may have a different take on the situation. The ongoing turmoil, which has caused the stock to fall by half in just the past three months, has left shares sporting some intriguing metrics. For example, Allscripts now trades for 1.4 times trailing sales. For rival Cerner, that figure is 6.0. Those numbers happen to be identical for each firm in terms of price-to-book (1.4 and 6.0) as well.
The challenge ahead is to stabilize operations and perhaps find a buyer. You should expect little from Allscripts in the June quarter, but it will be quite interesting to see what the new Chairman has to say about a turnaround strategy at that time.
2. Tempur-Pedic (NYSE: TPX)
Investors often react emotionally when a company disappoints them. This mattress maker had developed a strong investor base by boosting sales more than 25% in 2010 and again in 2011 (to $1.42 billion). Earnings growth was even more impressive, rising from around $1 per share in 2009 to $2.16 in 2010 to $3.18 in 2011.
So when the mattress maker recently warned that growth would cool in 2012, investors sprinted away. Shares closed at $83.75 on April 19, the day that guidance was issued, and fell to $66 the next day and now sit below $60.
As analysts at Hilliard Lyon subsequently noted, "while consensus expectations had apparently gotten a bit too enthusiastic, the reaction strikes us as equally overwrought."
The sell-off led Hilliard Lyons to raise its rating from "neutral" to "buy," along with a $70 price target. They see earnings exceeding $4 per share in 2013, despite the global economic headwinds, as the company expands into additional markets.
[block:block=16]Goldman Sachs carries a loftier $82 price target (down from $90), noting that management guidance now appears too conservative. They see a company generating very impressive free cash flow, which should hit $6.25 per share by 2014. That means this former highflyer now sports a free cash flow yield in excess of 10%, using 2014 projections.
Risks to Consider: Further market weakness could impede these stocks from rebounding, as they have already been placed on investors' watch lists as sell candidates for recent poor performance.
Action to Take --> Allscripts is emerging as a deep value play with potentially significant upside, while Tempur-Pedic simply looks like a good company delivering a tepid outlook. Upside is likely more muted for this stock relative to Allscripts, but the recent sell-off looks like a clear overreaction.
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