3 Stocks With Holiday Upside
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Every year around Thanksgiving I make a list of three stocks poised to benefit from eager Christmas shoppers. Seasonality, of course, is usually priced into the stock price. So the question essentially becomes, "Who could potentially do better than expected this holiday season?" This often reveals great investments with limited downside and large upside. Making it on the list, however, is not easy; it's difficult to identify companies with upside that is not already priced into the stocks. Most of the time, the market is pretty efficient. To look for cracks in Mr. Market's efficiency, I start with companies that have been oversold, ignored, or overlooked. This holiday season I've found one that fits each category.
The old saying, popularized by Buffett, still has meaning: "Be greedy when others are fearful and fearful when others are greedy." Conceptually, this saying makes sense. But unfortunately, it's tougher in practice.
Apple (NASDAQ: AAPL) shares are down over 15% since their high of over $700 just two months ago. Valuation metrics are looking very cheap. Apple trades at just 12.78 times earnings and just 9 times forward earnings. No matter how much negative sentiment surrounds Apple's shares, there are fundamental catalysts that should easily push TTM earnings higher. A study by Nielson News prompted them to label this an "iHoliday" season. Apple gifts proliferate the "most-wished for gifts" lists for both children and teens.
Apple's product lines are plush with new products for the holiday season. Tim Cook explained during the Q4 earnings call that they expect 80% of their sales in Q1 to come from new products–a higher ratio than ever before in Apple's history. This should result in a great Q1 and will overflow into Q2 and Q3 as Apple follows up with launches in China–not to mention more product and software refresh cycles.
Activision Blizzard's (NASDAQ: ATVI) stock price rose 8% over the last week after it announced yet another record breaking launch, booking over $500 million in worldwide sales in the first twenty four hours. But even after the 8% rise, the stock remains mostly ignored–down 3.3% for the year. Fundamentally, however, Activision is scoring an A+ with excellent management and execution of strategy, consistent success across all of its franchises, and an action-packed pipeline.
Measured by free cash flow (FCF) yield, Activision is available at an excellent price. FCF yield shows you what percentage of a company's share price is represented by the cold, hard cash it's churning out. The higher this percentage, the better:
At today's conservative valuation, Activition shareholders should benefit this holiday season from sales at Activision's existing game franchises and its launch of Black Ops II.
Often overlooked in apparel retail, Quiksilver (NYSE: ZQK) is a hidden jewel. Unlike the volatile trends in teen retail, Quiksilver offers more consistency as the world's leader in outdoor sport apparel.
At first glance, Quiksilver seems to be in a bit of a mess. But if you zoom out and take a look at the its story over the last 8 years, there is a clear turnaround in progress. Prior to the recession, Quiksilver made a huge mistake in attempting to increase its growth prospects by expanding into hardgoods businesses, including Rosignol (skis) and Cleveland (golf clubs). In 2007 and 2008, Quiksilver divested these franchises, realizing they were operational headaches, weighing heavily on the balance sheet and eating up cash.
These divestments have been paying off, slowly but surely. But of greater interest is Quiksilver's acquisition of DC Shoes in 2004. DC Shoes has turned out to be Quiksilver's all-star brand. As the franchise grows as a percentage of total revenue, its growth is going to have a greater impact on overall growth in the future.
In the third quarter earnings release for Quiksilver, DC revenue was up 16% year-over-year and e-commerce sales for the brand nearly doubled, making it the company's best performing franchise. This is a typical announcement every quarter that Quiksilver investors have come to expect. But over the next severals years this growth is going to make quite an impact on total earnings and revenue.
DC now represents over 28% of total revenue, and that's growing. Look for Quiksilver's DC brand to begin to have more influence on Quiksilver's profits this holiday season.
The Bottom Line
Oversold, ignored, and overlooked; these three companies all seem to have been underestimated this holiday season. What do you think? Do you think these expectations are already priced into the stock? Am I underestimating potential upside? Overestimating?
DanielSparks owns shares of Apple. The Motley Fool owns shares of Apple and Activision Blizzard. Motley Fool newsletter services recommend Apple and Activision Blizzard. 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!