After falling 6% in August and another 7% in September, the pall lifted over the market and the S&P 500 managed to rebound nearly 10% in October. Many stocks have ridden this upturning wave to surge two or three times this amount. But as the October rally fades with the close of the earnings season, some of these big gainers may be hit by a wave of profit-taking.
I've looked for all of the stocks in the S&P 500 that have risen at least 30% since the beginning of October, excluding any names that have agreed to be acquired or have a market value below $300 million. Some of these recent gainers have real tailwinds in place and could easily move higher.
Among these names, two stocks look more vulnerable. Their next move could be downward, especially if the November market action isn't nearly as supportive as we've seen this month.
With customers such as Apple (Nasdaq: AAPL) and Facebook, this provider of flash-based storage has created a considerable amount of buzz. Its technology sits right inside powerful web servers, sharply reducing the time it takes to cycle through large data sets. Rising demand for its storage devices helped Fusion-io boost sales more than 400% in fiscal (June) 2010 (to $197 million). Sales are likely to hit $300 million in the current fiscal year, according to analysts.
Shares have been surging since early October, when the company released an upgraded version of its core product that can pore through data sets at an even faster pace than prior models. Barron's also published a flattering profile of the company on Oct. 22, which accounts for the most recent upward move in the stock.
Yet a big problem looms: rivals such as EMC (NYSE: EMC) and NetApp (Nasdaq: NTAP) are preparing their own rollouts of flash-storage devices, and they have much deeper and long-standing customer relationships. (Privately-held players like Nimbus Data and Pure Storage are also gaining traction in the market). "[The company's] products are too expensive and competitors will soon undercut Fusion-io with pricing that are half to 1/6 of Fusion-io prices, " predicts Merriam Capital's Kaushik Roy, who says the stock will ultimately fall more than 50% into the low teens.
The looming competitive threat is a concern for 2012 and beyond. Near-term investors need to guard against a quarterly stumble, as is often the case with newly-public companies. The first quarter as a public company (the company's IPO took place in June 2011) is often a good one, since companies are careful to prevent any post-IPO stumbles that can kill long-term credibility. But the lofty expectations during the second quarter and beyond can be a millstone.
Considering this stock now trades for roughly nine times projected 2012 sales and 200 times projected 2012 profits, one false move could send shares tumbling. As a comparison, rival STEC (Nasdaq: STEC) trades for just in line with projected 2011 sales, on an enterprise value basis. Sterne Agee says shares could fall to $17 from a current $32 when competition finally starts to bite. Analysts at Auriga, who say shares will fall back to $16, predict quarterly results will be solid when they are released on Nov. 2. Yet it's the subsequent quarters that may spell trouble, according to Auriga, since potential customers hold off ordering as they review new-to-market products from EMC, OCZ Technology (NYSE: OCZ) and others. Auriga's basic premise is clear: Fusion-io "is a very expensive stock any way you try to spin it." They suggest Barron's recent bullish profile fundamentally misread and vastly overestimated Fusion-io's total market opportunity.
2. Liz Claiborne (NYSE: LIZ)
Companies often deploy a hefty amount of debt to gain a tax-shelter against earnings as interest payments are expensed. But in cyclical businesses like retail, too much debt can be a real problem. Retail and apparel firm Liz Claiborne had lost money every year since 2006, and realized this year that it was time to shed assets and remove a stock-pressuring debt load. Mission accomplished: Liz Claiborne sold the rights to its Dana Buchman, Mac & Jac, and Monet brands for a collective $328 million earlier this month. This should take long-term debt from about $500 million to a healthier $200 million. Investors cheered the move, pushing the stock up from $4.50 to $8 in October.
Trouble is, the company's remaining assets -- a collection of brands such as Kate Spade, and roughly 800 stores in the United States, Canada and Europe -- may not be worth as much as the share price implies. Management recently issued updated EBITDA guidance, which Merrill Lynch's analysts parlayed into earnings-per-share (EPS) forecasts. They say Liz Claiborne will earn just $0.30 a share next year and figure the stock deserves to trade at 13 times this forecast. Their $4 price target implies a 50% fall for this rebounding stock.
Risks to Consider: If October's impressive rebound can be sustained into November and December, then these momentum stocks could surely stay aloft and rise even more. It would take a flat or down market to take the wind out of their sails.
Action to Take --> We're back into a steady rhythm in the markets: August and September weakness unveiled clear buying opportunities, whereas October opened the door to book quick profits. Riding the ebb and flow of these trading cycles may be the theme for the coming months, as investors cycle back and forth between pessimism and optimism. These stocks are surely the beneficiary of newfound optimism, but may not hold up if and when this optimism fades.