Which of These Surging Stocks has Even More Gains Ahead?
Investors looking to score big gains should always pay attention to the retail sector. Not the top retail stocks that seem to pound out modest sales gains each year, but the weaker retailers that have hit a rough patch. These retail firms could see shares slide far below prior peaks once same-store sales weaken and investors shun them.
Yet these broken retailers can also become vastly oversold — and great bargain-hunting fodder. For example, I suggested that women’s apparel retailer Christopher & Banks (NYSE: CBK) was far too cheap — based on tangible book value and sure enough, the stock eventually took off like a rocket. In fact, a number of oversold retailers make up the list of leading gainers in the just completed third quarter.
In almost every instance, these retailers had traded sharply lower in prior quarters, which is precisely the time that you should be focusing on them. Whether it’s a buyout offer, or simply a turnaround in same-store sales trends, the room for upside is considerable once the crowd pivots back toward these broken down retailers.
Other big gainers
The third quarter wasn’t only kind to the retail sector. Homebuilding stocks were scorching hot, led by big gains in KB Home (NYSE: KBH) and PulteGroup (NYSE: PHM). But as I recently cautioned, this rebounding sector could easily cool down in 2013 as the economy remains weak, before heating up further into mid-decade. So if you own these stocks, then you may need to be prepared for a near-term pullback before they eventually move up to their cyclical peaks.
The wireless service sector also posted solid gains. An increasingly optimistic view of Sprint (NYSE: S), which I profiled during the second quarter, helped this stock to post huge third-quarter gains. I wouldn’t be surprised to see Sprint move past the $6 a share mark in coming weeks on the heels of another solid quarterly report, but further big gains appear unlikely.
The same can be said for MetroPCS (NYSE: PCS), which nearly doubled in the second-quarter on hopes of a buyout from Sprint or another player. Just this week, rumors have suggested that T-Mobile may be looking to acquire metroPCS, pushing the stock nearly 20% to a fresh 52-week high. After that kind of move, it’s hard to see how any buyout offer would come much above the current price.
So which top third-quarter performers should investors be looking at now?
SkyWest’s accretive buyback
Although many companies announce buyback plans, you should mostly be paying attention to only one kind of buyback: Any plan that is done while shares trade for less than tangible book value. That’s because a “below book” buyback instantly boosts book value per share for every share retired.
Let me explain…
Regional airline SkyWest (Nasdaq: SKYW) currently trades at around $10.50 a share and has tangible book value of $25.71. The airline plans to buy back 6.5 million shares, shrinking the share count around 12% to roughly 45.3 million. This should actually boost book value per share to $29.40. Rising book value per share, thanks to this accretive buy back, is a sure sign of a buyback’s value. And it makes this stock’s current value a deep bargain.
The best solar stock in the block
Much ink has been spilled about the meteoric rise and subsequent fall for clean energy giant First Solar (Nasdaq: FSLR). By the time I wrote about the company five months ago, it appeared as if the stock had hit bottom, and according to analysts at Merrill Lynch, had morphed into a deep-value play. Shares initially continued to slide after that, but have since posted a quite solid rebound.
#-ad_banner-#As I cited the opinion of Merrill Lynch analysts back then, it’s worth checking in with them again, now that shares are back up in the low $20s. They recently sat down with management and concluded that despite the solar industry’s deep pressures, the company’s multi-pronged approach to solar panel production and solar-power generation contracts sets the stage for “stable operating margins in the 10% to low teens range,” according to the analysts. That works out to earnings power of about $4 a share. And if that’s the case, then this stock is still too cheap. Merrill’s analysts say a $30 price target is appropriate, perhaps setting the stage for a second straight quarter of robust gains.
The company’s decision to pursue major utility contracts now looks wiser, as it should being in ample cash flow during the next few years. “It seems apparent to us that First Solar is going to be in a position of increasing financial strength during the coming six to eight quarters as the company monetizes its existing backlog of business. That gives First Solar maneuvering room to try and keep its panel costs dropping, while most of the competition struggles to cope with deteriorating cash flow and weakening balance sheets,” noted the analysts. In effect, this should be the best house in an increasingly bad neighborhood.
Risks to Consider: These stocks surely were aided by an ever-rising stock market, so a market reversal may make it hard for them to keep rallying.
Action to Take –> Even though a few of these stocks look especially appealing, you should track all of the stocks on the table above. Quick gains often lead to profit-taking, which may set up a buying opportunity for these rejuvenated businesses as their shares consolidate.