Five Stocks Hit Hard by Sellers, But Two Still Offer Something for Buyers
Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It has been just over a month since my last review. In that post I featured stocks which were existing holdings of mine. For the record, I added to these positions in November as I took advantage of the 9% drop in the S&P. Under my investing thesis, the market hadn't reached the level I like to see to add new positions, but that is not to say there isn't value to be found.
Of course, time has been kinder to some stocks more than others. It's easier to start with the victims. Stocks which have come under some hard selling pressure since featuring in my reviews include NetEase (NASDAQ: NTES), MercadoLibre (NASDAQ: MELI), Chesapeake Energy Corp (NYSE: CHK), ISIS Pharmaceuticals (NASDAQ: ISIS) and Splunk (NASDAQ: SPLK).
NetEase first featured in April, but it was proven to be an unhappy introduction. The stock is down 28% from its feature price. The company operates within the multi-player online game sector, and had in April, renewed its license with Blizzard for 'World of Warcraft.' However, Chinese stocks and Chinese gaming stocks in particular, have had it hard. Revenues were again down for its WoW license, but its in-house gaming department continued to grow and helped offset its license losses. NetEase had a recent earnings miss, to follow one in the previous quarter, which left analysts in a race to cut price targets for the stock. The stock is not without favor. The underperforming Activision Blizzard license should - at some point - offer revenues closer to expectations, along with the not yet confirmed, but looking good, Diablo III license. But it's the in-house gaming development which will likely deliver the underlying growth, and there isn't nothing worrying about those figures. I suspect it will continue to feel the pressure generated by broader Chinese stocks, but I wouldn't exclude it from the watchlist.
MercadoLibre was first mentioned in May, but has suffered a series of losses to leave it more than 20% discounted from its feature price. Earnings have steadily climbed through the year, and its most recent earnings report came in at expectations. Unfortunately, this strength emerged from its diversified business units, which had to offset a slowdown in its core marketplace. Its payment solution, MercadoPago, grew through its "compulsory" adoption on "select seller profiles and product categories." It's also generating triple digit growth rates on off-platform payments. I would be a little concerned on the terminology used, if "compulsory" really means 'not as good as competitors' with respect to adoption, then this might be a worry down the road.
Mobile growth looks promising, with between 4 and 10% of transactions (by country) generated through this medium. Registrations were up 25% year-on-year, with a 65% growth in payment transactions. Expenses were the drag, with emphasis on hosting and customer service costs. The cost in expansion of its payments business also contributed to the contraction, but this should be offset by increased revenue down the road. Forex issues also clouded the revenue picture, and limited guidance. Interesting sidebars, which may prove bigger down the road, was the quick gloss over on increased problems with fraud in Q3, along with the distribution of its cash holdings. The core figures suggest everything is good, but there may be a hidden story which hasn't hit the headlines yet.
Chesapeake Energy already carried baggage when it was featured in March. Low gas prices, corporate governance and CEO piggy bank activities all stressed the stock. However, Carl Icahn rode to the rescue in May, upped his stake, and kicked out the incumbent CEO. Gas prices have also staged a mini-recovery from bottoming in April. The company is anticipating a cold winter, certainly better than last year's "exceptionally warm winter," which should lead to an increase in gas prices; the company stated for every +$0.10 change in gas prices, adds $100 million in EBIDTA (and I suppose the reverse its true too!). However, recent earnings were a disappointment, with projections well below the comparable quarter of last year.
The company is working hard to reduce its long-term debt through the sale of assets, with a goal to reduce it to less than $9.5 billion, and keep it below this level in the future. As it stands, the company has a reported debt of $16.5 billion. It has set a deadline of year-end 2012, but from the conference call, Q1 2013 is looking a more likely target to achieve this. Additional asset sales of $17-19 billion are projected for year-end 2013. In summary, Chesapeake has taken the medicine, but it will probably take 18 months before the effects of the treatment are known fully. Its sidebar is a reported slowdown in drilling, but higher gas prices should compensate with tighter supply. A good accumulator for the dollar-cost-average approach.
ISIS Pharmaceuticals was one of the most recent features, dating only to September, but even during this limited time, it has managed to shed close to 40% of its stock price. The company was looking towards FDA approval for its KYNAMRO product, created in collaboration with Genzyme. The company did scrape FDA approval from the metabolic drug committee - a precursor to full FDA approval. However, KYNAMRO has safety concerns in Phase III, where half of a 141 patient study, discontinued the treatment due to side effects. It was further reported, 3.1% of patients taking the drug developed tumors. A final decision from the FDA is expected by Jan. 29, 2013, which would also generate a milestone payment. Another spanner in the works was approval of a potential competitor drug from Aegerion Pharmacteutical's, Lomitapide. Lomitapide had a far easier time getting past the FDA metabolic drug committee, and may offer itself as a more favourable solution where side effects may play a bigger role than efficacy of the treatment itself.
The last stock to make this list was Splunk. Splunk, featured in September, and operates in the Big Data ecoystem. The stock has fallen victim to a sector wide sell off in Technology, which was enough to trim 20% off the stock price. However, it was able to find buyers around $26 a share, as it had in early summer. Whether it can sustain this support is up to debate. A significant sell off by insiders, stiff competition from Oracle, and lowered corporate capital spending, all offer headwinds for the stock. Earnings are due on Nov. 29, which will only add to unease. A drop below $26 would set the cat amongst the pigeons, and it would have investors looking back at September's $39.75 rather wistfully. As a relatively recent IPO, it's hard to gauge at what point buyers will want to step in should the selling run past November's earnings. Because of this, it may be best put aside and fresh eyes applied in the New Year.
These five stocks have all suffered, but not all have suffered for good reason. NetEase and Chesapeake are two stocks which are likely offering good value, with time-in-hand to generate a recovery. The remaining three all have uncertainties, which make their long term prospects more dubious.
fallond has no positions in the stocks mentioned above. The Motley Fool owns shares of MercadoLibre. Motley Fool newsletter services recommend MercadoLibre and NetEase.com. 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!