How to Trade These Companies in 2013

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

In my article today, I have picked up three mid-cap stocks which saw a fall in their stock prices since the beginning of 2013. These stocks are AU Optronics (NYSE: AUO), IAC/InterActiveCorp (NASDAQ: IACI) and Lululemon Athletica (NASDAQ: LULU). AU optronics and IAC have some hurdles in their path in the near future with AU facing stiff competition from the players in the Chinese market and IAC has already lost considerable amount of online traffic. As for Lululemon all I can say is that this downfall is nothing but a good opportunity to buy a strong stock at a lower price. Let us discuss these stocks in detail: 

Name of Company

Percentage of fall in share price (~)

AU Optronics Corporation

-13.31%

IAC/InterActiveCorp

-13.23%

Lululemon Athletica Incorporated

-9.03%

Source: Google Finance 

AU Optronics Corporation 

The consolidated revenue for the month of December, 2012 of AU Optronics showed a ~15.7% increase in revenue on year-over-year basis. But what bothered me was the declining trend of month-over-month sales. In both October and December the company had a negative growth rate and even the slight increase of ~1.4% in November was marginal. I feel this trend will continue for the company in the near-term and I expect a decline of ~11% in revenue in the next quarter.

The downfall is mainly due to increasing pressure from the company's Chinese rivals which are continuously increasing their capacities. This could not have been visible in the dawn of the year, but by the fall of 2013 this will make a noticeable presence. The Chinese players will represent ~15% of the global capacity by 2014 from just 10% in 2012. AU is heavily exposed to the Chinese market as its TV brands currently represent ~25% of AU's revenue. Because of TV makers moving to in-land manufactures and more capacity to come by end-2013, I believe AU's market share could see a negative impact. Along with that the company's solar panel business in China is also under threat. With the introduction of Energy Subsidies by the government due in mid of 2013, Chinese panel makers may hurt AU’s market share in the near-term. Overall the company is expected to face near-term headwinds and I feel this would not be a right time to make investment in this stock. 

IAC/InterActiveCorp 

According to the recent comScore analysis, traffic on Ask.com has been volatile and the recent trend showed a negative growth in page views and a disappointing growth in unique visitors. For 4Q12, the company's overall page views were down by ~17.1% and unique visitors were up by ~6.7%. Ask.com is its flagship brand in online search which contributes to its revenue on a majority basis. Therefore, the negative growth raises some serious issues for the company. Page views on Ask.com were mainly affected in November and December in the past quarter where it was down by ~14.8% and ~22.3% year-over-year (y/y) respectively. Total unique visitors were up ~7.6% in November, but the same decelerated to ~2.8% y/y in December which thereby reduced the overall growth. Along with that, Ask.com's keyword buying in 4Q12 has declined by ~38% y/y. I believe these data are more of a directional indicator than the absolute basis to measure the company’s financial performance. But even then page views and unique visitors are the key growth drivers of stocks of this industry and the continuous decline is a matter of distress for the company as well as the investors.

Over all speaking I doubt that until and unless IAC improves its current online exposure, the company's stock won't see a high side. So my verdict in the short run is a sell. 

Lululemon Athletica Incorporated 

For some retail stocks same-store-sales (SSS) of high single digits may not be a disappointing figure. But when Lululemon guided the comp at high-single-digits in 4Q12 its stock saw some downward trend as it had a SSS of ~20% in FY11. I think that the reason for the decline in SSS was the near maturity of its Canadian stores which make ~$3000/sq feet. But the company's younger stores in the US will be the future growth drivers of its sales. I believe that incremental investment spending in product development and technology investments can make the U.S. fleet even more productive. This will also help the company to offset the international expansion costs as the management begins to open new stores in Hong Kong and sets the stage in Europe with the addition of several more showrooms.

I don't think the decline in SSS is a disappointment from Lululemon's part. The reason for this is that in the revised guidance of 4Q12 the company pointed out that its revenue and EPS will be on the higher side of the previous guidance i.e., ~$480 million and ~$0.74 per share respectively. I agree with the guidance by the company and expect that in 2013 the company will maintain its operating profit at ~25% and will generate a free cash flow of ~$300 million. 

Summing up I can say that stocks of AU and IAC will face some difficultly in the short term although in the long term they can recover. On the other hand strong guidance and expansion programs will help Lululemon to outperform in future.


madhudube has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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