3 Mid Cap Stocks With Good Momentum
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I discussed three large cap stocks which have seen impressive run up since the beginning of this year in a previous article. In addition to large cap it is also interesting to analyze mid cap stocks with strong momentum. Below, I have discussed three mid cap stocks: Herbalife, Best Buy and Research In Motion which have seen a 20% plus run up year to date. Herbalife’s stock tumbled 38% to $24 after Ackman's short attack on the company last December. But the company has bounced back recovering fully with investors showing confidence in the company. On the other hand Best Buy released its sales for the nine-week holiday period ending January 5, 2013 which were on track. RIMM saw this surge because of the optimism among the investor for its much talked about BB10. Let’s analyze these stocks in detail.
Herbalife (NYSE: HLF): The company has been facing several accusations from Ackman, a Hedge Fund manager who recently bet $1 billion against this nutritional products maker and has taken a short position in the stock. Ackman believes that Herbalife is operating an illegal pyramid scheme and has a price target of Zero on the company. But many other Hedge Funds including Daniel Loeb favor Herbalife and believe that the company has an efficient business model. Daniel Loeb has recently taken an 8.2% stake in the company and purchased 9 million shares opposing Ackman's short bet. Loeb wrote a letter to the investors where he states that the stock price of Herbalife can jump to $55-$68 from the current level. I agree with Loeb and believe the company's fundamentals are strong. The company has shifted its business model from selling bulk orders at irregular intervals to selling small orders frequently thereby noticing significant growth. North America is the company's main revenue generator and accounts for 20% of its sales from this region and with its nutritional club business in North America doing good, double digit sales are expected in 2013. With solid earnings track record, impressive cost saving plans from vertical integration, and an attractive dividend yield of 3.4%, I believe the company is a good long candidate.
Best Buy (NYSE: BBY): Finally, this struggling Electronic Retailer has had some respite and has recently posted better than expected sales numbers. The company posted revenue of $12.8 billion this holiday season that was slightly lower than last year’s $12.9 billion. The domestic same store sales managed to be flat at 0.0% as against the expectation of -0.3% for the 3Q12. This was mainly driven by mobile phones, tablets/eReaders, appliances, etc. and also because of its price matching program. The domestic online channel increased 10% y/y to $1.1 billion with strong customer traffic and with its free shipping offer for electronic products like TVs. As many of its competitors had limited free shipping offers, Best Buy took advantage of this situation. On the other hand, international business remains a weak area for the company as the same store sales declined by -6.4% as compared to -3.1% a year ago facing major challenges in China and Canada. With a generally happy holiday season all around, I feel that the increased competition from online and other vendors remains a concern for the company. And to offset this, Best Buy has to focus on becoming a major multi-channel retailer and make efforts to keep its consumers engaged for shopping online or inside the stores. The company has also reduced its free cash flow estimates to $500 million from November’s estimates of between $850 million to $1.05 billion; this further lowers my confidence in the company. The sales figures look good for now, but the reality is that the company is losing business. Although the company has seen 20% run up year to date, I don't feel that at this juncture the company is worth considering to buy.
Research In Motion (NASDAQ: BBRY): RIMM failed to realize the importance of BYOD (Bring Your Own Device) that has gained a significant attention in recent times and has become a preferable choice for consumers. Now the company is making efforts to rebound with the BB10 being the potential savior. For consumers the service fee for BB10 will be Zero which is expected to keep it on better price parity against the iOS and Android while for the enterprise it will give options which include multi-platform mobile device management and advanced security that will drive services and software revenue. The company claims BB10’s software is better, but I remain doubtful whether it will beat iOS or Android. Also, the competition for Blackberry is not limited against the BB10, Samsung in the CES 2013 showed its new flexible display technology, Youm. This flexible screen uses OLED display technology with super form factor and it has been designed to bring better contrast and colors. RIMM has also seen a significant decline in its subscriber base as in November the company lost 1 million subscribers and ended up with 79 million. This decline is likely to continue in the future with the growing competition from Apple and Google who have a hefty application base. I don't feel that the company can regain its top position in the future.
To conclude, I’d place a strong bet on Herbalife as the company’s recent run up is justified with tremendous growth opportunities in the future. Best Buy remains a hold for now because it is doubtful whether these sales figures will continue with the same momentum. On the other hand, I will follow a wait and watch approach for RIMM and would consider taking a long position only if BB10 gains traction.
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