Our latest buy signal lasted about as long as a Red Sox starting pitcher this month (read: not long!), but once there’s a more sustained rally, there are some good bargains out there, writes Michael Cintolo of Cabot Top Ten Trader.
I wanted to touch upon a topic that is likely to come up in the weeks ahead. That is, once we get a new, sustained uptrend, what stocks do you buy?
Unfortunately, many investors go right back to the trough of the last uptrend. They’ll talk about Baidu (BIDU), Acme Packet (APKT), Riverbed Technology (RVBD), and Salesforce.com (CRM).
After all, all are still good companies, all are still posting solid growth, and the underlying drivers of their growth are still in effect. So why wouldn’t they be good buys?
The funny thing is that, when coming out of a "normal" bull-market correction—three to six weeks, maybe 8% to 12% declines in the indexes—such thinking often works. The leaders of the bull market are leaders for a reason, and they tend to lead through at least one correction (or, in the case of a mega-leader like Baidu, for the entire bull-market cycle).
However, I believe that no matter what you want to call the current downturn (bear phase, sharp correction, etc.), it’s been long enough and deep enough that many of those "old" names won’t come back. But don’t take my word for it—take the market’s word.
That is really the point of this whole discussion. If the stock you’re considering is sitting 35% or 40% off its prior peak, it might rally for a bit when the market does. But it’s not a leader anymore; a drop that severe, especially coming over many months, clearly tells you that perception has changed. Dead-cat bounces can happen, but new, sustained up moves are far less likely.
All of this is why I often harp on keeping an eye on those stocks that are resisting the market’s downward pull. By definition, these are the names that big investors are reluctant to sell…and hence, have a great shot of delivering profits during the next bull run.
And, yes, some of them might be those "old" names—Apple (AAPL), Green Mountain Coffee Roasters (GMCR), and some others are still hanging in there.
But don’t fall into the trap that, because a stock was good during 2010 or earlier this year, that it’s necessarily going to be good when the market gets going again. More likely is that those obvious, overplayed, over-owned names will lag as some fresher merchandise leads the next up move.
One of those pieces of fresh merchandise is Universal Display (PANL), a small firm with a (very) long history of losses and little institutional support. But that’s now changing, and it’s all because of its leading position in OLEDs (organic light emitting diodes), which are looking more and more like they’ll be adopted en masse for smartphones, TVs, tablet computers, and more.
So how will this benefit Universal Display? It owns more than 1,000 patents, and it’s aiming to be a licensing company—in fact, it’s recently inked deals with Panasonic and Samsung, which sent the stock into orbit.
Valuation is truly at nosebleed levels—the firm has no earnings and just $39 million in revenue, but the market cap is $2.3 billion!
That said, high valuations don’t scare me, partially because I focus on the future. Revenues have been growing nicely, and if Universal’s licensing business can lift next year and in 2013, profit margins will go through the roof and earnings will explode.
Currently, a handful of analysts that have estimates see revenues up 63% this year, but rising another 104% next year. And earnings could go from about breakeven this year to 86 cents per share in 2012.
I won’t pretend to know all the ins of outs of these estimates, but my experience is that when a new technology gets adopted by the market, it’s usually done so far faster than most expect, causing the bottom line of the firms who benefit to grow at lightning-fast rates.
I’m not predicting that will definitely happen with Universal Display, but I’m open to the possibility.
I’ll look to the stock for clues. Shares did have a big run late last year and earlier this year, but then suffered a harrowing drop of more than 50%. But that’s when the action started—a new licensing deal caused the stock to jump a jaw-dropping 85% during the last week of August, on weekly volume that was both quadruple the average rate, and more than twice as large as any total in the stock’s history.
And since then, PANL has held those gains, actually rallying all the way back to its old peak of $60 before backing off with the market’s latest weakness. I would love to see this stock meander in the $45 to $55 range (it’s a very volatile name) for a few more weeks, then blast off with the market.
Right now, a nibble in the upper $40s with a stop around $42 is OK if you’re aggressive, but I would rather wait for a proper, tighter set-up. Watch for it.
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