The Best Ideas of the Week

Each Friday we highlight the most compelling investment ideas that our research has uncovered from the 30 or so stocks that made it into our daily “winners” and “losers” write-ups during the week…

Perfect World (Nasdaq: PWRD)

Investors jumped into China-related stocks on Monday, looking for companies that would benefit from a stronger yuan and/or more robust Chinese consumer spending. Perfect World was seen as a play on that latter factor, and shares rose sharply Monday morning.

#-ad_banner-#But after briefly touching $26 mid-day on Monday, they’ve been in freefall since, trading down to $22. There’s no good reason for the sell-off, though as we’ve noted before, Chinese gaming stocks may not be very timely as the industry is going through one of its once-every-few years no-growth modes. The industry — and Perfect World — are suffering from a dearth of hot new titles at the moment. The company’s quarterly earnings per share have been flat in the $0.70 to $0.80 range during the past four quarters. And it probably won’t be until the December quarter before they bust out of that range.

But over the long-haul, this is still a growth story. That’s because Chinese Internet penetration remains low, but is growing at a very fast rate. During the next ten years, the size of the potential Chinese gaming market could double.

Action to Take –> Meanwhile, investors should take comfort in rock-bottom valuations. Shares trade for less than seven times 2010 projected earnings, which by the way, should grow another +20% next year, to around $4, according to consensus forecasts.


Jabil Circuit (NYSE: JBL)

Shares of electronics parts maker Jabil Circuit failed to rise further after a nice earnings-related surge on Wednesday.

The lack of follow-through may be due to the fact that earnings estimates have barely budged since the company issued blowout earnings and guidance. But we remain convinced that 2011 EPS estimates need to rise from the current $1.65 to around $2. But we are also convinced that investors are shunning all tech stocks for fear that Europe will melt down. Jabil is one of many tech stocks that are poised for solid growth and trade on the cheap.

Action to Take –> Few tech stocks are this cheap. A price-to-earnings ratio (P/E) of seven usually implies that earnings are at the top of the cycle. But in this case, the cycle may just be getting going, and per-share profits could rise another +20% to +30% in 2012 if recent growing tech trends stay in place.


Bed, Bath & Beyond (Nasdaq: BBBY)

While Jabil and Perfect World appear to possess considerable upside, their global exposure presents a bit of risk. Investors searching for upside with a safer domestic focus should check out Bed, Bath & Beyond, which got hit hard this week after issuing seemingly disappointing guidance.

Shares are bumping along six-month lows, even as this retailer should still earn well more in 2010 than investors expected six months ago. Management gloom-and-doom is par for the course. If you take a deeper look at operations, you’ll see that the retailer only needs to post small same-store sales gains to boost earnings growth above the +10% mark. An eventually strengthening consumer should push those metrics even higher.

Action to Take –> Bed, Bath & Beyond saw the economic downturn put a key rival (Linen’s & Things) out of business. The market for home furnishings may not be growing very much, but BBBY can now control a larger slice of that market. As unemployment drops in subsequent years, sales and profits should keep rising. Forget management’s dour near-term view. Focus on the bright long-term.