4 Stocks That Could Be Ready To Rise

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

As it is explained in one post in my blog Warren Trades, I think that the best investment decisions come from combining a solid fundamental thesis with a strong technical picture or constructive price action. In other words, I study fundamentals of each company, but I need confirmation that the stock is performing better than the overall market in terms of its price action. In this article I detail 4 stocks I am currently observing because I feel they could be ready to rise when the current correction ends. 

The whole solar sector could rebound from current depressed levels

The first one is First Solar (NASDAQ: FSLR). The stock could be an interesting trading play considering that Obama has said repeatedly that he supports government investments in clean coal technology and renewable energy and Morgan Stanley seems to agree on this story as they recently reported an 11.6% passive stake in First Solar according to the last 13G filling from November 8. First Solar recently reported stronger than expected 3Q12 earnings, but adjusted 2012 full year guidance based on market conditions. In the conference call, James Hughes (CEO) explained that the solar industry remains challenged as they have seen an increasing number of production cuts, capacity reductions and bankruptcies. However, they have started to see signs of stabilization and a generally better feel to the marketplace although he pointed that evidence is largely anecdotal and intangible in nature today.

Despite an oversupply in modules, First Solar continues to execute its solar project pipeline. Reported margins were strong in 3Q12, but management guidance implies margins will decline in 4Q12 as First Solar starts construction of newer projects with lower pricing. I think that First Solar could be a very compelling trading play if shares break the current $25.70 resistance, but I do not feel comfortable with this stock as a long term investment play. As detailed in my blog, I urge investors to employ a strict stop-loss methodology in this kind of trade. 

The strongest financial stock ?

I think that BlackRock (NYSE: BLK) is a solid financial pick. Larry Fink, BlackRock founder, built a diverse platform focused on delivering strong investment performance and solutions for its clients' need regardless of market environment. In the third quarter, BlackRock delivered record earnings per share up 23% from the prior year and margins over 40%. In fact, BlackRock is a top growing financial franchise as it reports a 3 year average revenue growth of 21% and EPS growth of 28%. Not many US financial companies show this kind of growth. In addition, BlackRock achieved these results through robust new business generation across each the company's channels with particular strength in key growth areas such as retail and iShares.

The most important metric in BLK is the growth in assets under management. The company reported that its AUM totaled $3.673 trillion at September 30, up 3% from June 30 and up 10% from a year ago. BlackRock is also a top dividend stock as it yields 3.2% and has increased dividend payouts at an average 20% annual growth over the past five years. In addition, the company was one of the few financial firms to not cut its dividend during the financial crisis. Its valuation is very reasonable considering that the company has beat earnings estimates for six straight quarters and sells at 13x times forward earnings, a discount to its five year average of 19x. BLK also trades at a PEG of 1.4 (above 1 is desired), has a strong free cash flow/sales multiple of 28% and reports strong institutional sponsorship evidenced in the recent investment that prominent value investors Ken Fisher, David Dreman and Mario Gabelli made in the stock.

A growth story in the retail sector

LuluLemon (NASDAQ: LULU) is one of the highest growth stories in the retail sector. The company recently reported solid 2Q12 results, with the strength extending into 3Q12. Demand for lulu's product remains strong and I continue to believe that lulu's growth potential remains significant both in the US and abroad, with international expansion efforts remaining on plan and likely to accelerate in 2013 and 2014. Top investor Steve Mandel, founder of Lone Pine Capital, added to his lululemon position last quarter at an average price of $70. This is an interesting fact considering that he started the position in December 2011 and the last quarter was the first time he added to it.  The company has continued to show strong YOY comparisons as it has expanded to include 189 retail stores, 38 showrooms and 5 outlets. I think lululemon will continue to grow as it targets 350 stores in the coming years. Lululemon is different as other retailers as it first sets up a showroom in the market and engages with the athletes in the community. Once it establishes a feel for the community it enters the market and opens a retail store. 

One of my best restaurant picks

Lastly, Yum! Brands (NYSE: YUM) is one of my favorite restaurant stocks. Prominent investors Ken Fisher and Robert Karr (founder of Joho Capital, ex-Julian Robertson analyst) initiated a position in the stock last quarter. Yum is still growing in China, reporting same-store sales growth of 6.0% but below consensus estimates of 6.3% and 19.0% last year. Clearly the broader economic slowdown in China has caused at least a short-term deceleration in comparables (14.0% in 1Q, 10.0% in 2Q, 6.0% in 3Q). The positive view is that U.S., same-store sales increased 6.0%, noticeably outpacing the consensus estimate of 4.3%, and (3.0%) reported last year.

I like the fact that Yum's margin are increasing, evidenced by the fact that worldwide restaurant level margin increased 190 bps in the quarter to 18.9% and all three segments showed margin improvement with a 10 basis points increase in China, 100 basis points at YRI and 460 basis points of improvement in the U.S. Yum! management, led by CEO David Novak, works as a result around the objective of delivering dynasty-like performance of at least 10% annual EPS growth. YUM just raised its guidance and expects that 2012 will mark the 11th consecutive year delivering at least 13% EPS growth before special items. This company is a true emerging market growth story as 60% of its profits are generated in emerging markets which is where the real economic growth in the world is occurring today.

I think this is a strong secular trend explained by the fact that there are only two restaurants per million people in emerging markets compared with 58 restaurants per million people in the U.S. David Novak also explained that they have 38,000 restaurants with underutilized assets and they are laying the foundation for more substantial same-store sales growth by developing breakfast, beverages and broad and improved asset utilization overtime. Meanwhile, YUM returns continue to be among the best in the restaurant industry with return on invested capital over 22%.

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Investors and bystanders alike have been shocked by First Solar's precipitous drop over the last twelve months, and now the stakes have never been higher for the company. Are they done for good, or ready for a rebound?  If you’re looking for The Motley Fool’s recommendation on how to approach investing in First Solar, along with continuing updates and guidance on the company whenever news breaks, the Fool has created a brand new report that details every must know side of this stock. To get started, just click here now.

martinzaldua has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend BlackRock, First Solar, and Lululemon Athletica. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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