2 to Buy & 1 to Sell After Earnings on Monday

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Monday was a somewhat slow day in terms of companies reporting earnings; however like all days during earnings season, opportunity still presented itself. Earnings season is a period where retail investors can either capitalize on great opportunity or can be suckered by what looks like value. In this piece, I am looking at both, one stock that should be avoided, and two stocks to buy.

Speculation and Modest Growth is Not Worth this Stock’s Price

Shares of the tech company Stratasys (NASDAQ: SSYS) traded higher by 7.1% on Monday after the company reported earnings. The company met expectations on the top line with non-GAAP revenue of $96.4 million and beat bottom line expectations by $0.02 with an EPS of $0.40. Stratasys was one of the best performing stocks of last year but has seen a slow start to the year. Now, investors believe this quarter may jump-start the 3D printing space.

When you consider Stratasys’ revenue over the last 12 months was just $359 million, you can see that its market cap of $2.64 billion is very expensive. The stock trades with a price/sales of more than 7.0 yet has top line growth of less than 25%. This supposedly is a high-growth company, one the CEO said is “rapidly growing.”

Although it is growing, much of its upside is tied to the belief that the 3D printing space will grow into the tens of billions in a consumer-driven market. While I don’t know how this story ends in terms of growth within the next five years, I do think that Stratasys’ P/E ratio over 80 is way too expensive for a company that is guiding for growth of 24% in 2013. Therefore, I’d sell and take profits.

An Underperforming Healthcare Stock that Keeps Getting Fundamentally Cheaper

Myriad Genetics (NASDAQ: MYGN) fell 2.83% on Monday after reporting earnings that largely exceeded expectations. The company grew by 21% over last year and increased full-year guidance above The Street’s expectations. Myriad has traded flat over the last year and is currently near the bottom of its range.  

Therefore, it’s hard to determine why the stock might have fallen. One possible reason could be fears that Medicare will reduce its pricing for the company’s products. Myriad gets 10% of its revenue from Medicare and this fear, especially after Medicare reduced pricing on Nordion’s product, might have been responsible for the loss.

The good thing about the Medicare concern is that it doesn’t really matter if they reduce pricing; 10% is a small percentage and it’s not as if Medicare would refuse to cover the products, but might reduce pricing by a percentage. This is a very stable company with great margins that is priced very cheap. Remember, Stratasys trades with a P/E ratio over 80 and a price/sales over 7.0. Myriad has very similar growth yet trades with a price/sales of 3.6 and a P/E ratio of 16.5 in a healthcare space that usually boats hefty valuations due to margin strength. To me, this is value, and I’d buy a stock that has much fewer questions compared to the overvalued SSYS.

Regardless of Performance this Stock is a “Must-Buy!”

In after-hours trading, shares of Santarus (NASDAQ: SNTS) are trading higher by 8.84% on volume of 240.1k. This large pop came after the biotechnology company reported earnings that crushed Wall Street’s consensus. The Street was expecting revenue of $62 million, but the company reported $70.2 million, and then with its EPS of $0.08 it also beat expectations by $0.07 (take a minute to think about that). Therefore, this was one of the more impressive quarters of the earnings season.

The company’s 65% top-line growth is remarkable, and furthermore is its bottom line growth of 180% and its full-year EPS guidance between $0.92 and $1.00. This compares favorably to The Street’s expectations of just $0.70 and shows a continued strength in margin growth. As a result, this is a must-buy in biotechnology, a stock that is growing as fast as possible with a one-year return of 200%.

Even though the company is growing by more than 60% year-over-year, this is a stock that is trading with a price/sales of just 4.0 and a forward P/E ratio near 10.0 (after updated guidance). With that being said, I have no idea how the stock will trade on Tuesday. It is possible that it will open and trade flat or even lower, as stocks tend to trade illogical following earnings.

However, this is a stock that can’t appreciate fast enough to keep up with its fundamental growth, and was trading with after-hour gains of almost 9%. Even if the gains hold, I still think this is a “buy” and if it ticks lower I will buy on every dip, because this is a stock that is worth every bit of $20 and then some.

Conclusion

In my book, Taking Charge With Value Investing (McGraw-Hill), I examine human behavior and the psychological effects that take place in the minds of investors when a stock shoots higher or falls drastically lower (think roulette at a casino), with one scenario being earnings. For many investors, chasing these trends is common, even addicting, and very few are capable of realizing their losses because of their occasional gain.

Investors need to avoid this behavior after earnings, and look not at the performance of the stock but rather the performance of the quarter. By doing so, you will be able to find the inconsistencies and a distinction between performance and fundamentals, which creates value and allows for large returns. 


BrianNichols plans to purchase SNTS within the next 72 hours of this writing. The Motley Fool recommends Stratasys. The Motley Fool owns shares of Stratasys. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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