2 Conviction Buys and 1 Must Sell Stock
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
We currently cover technology and consumer sectors quite closely at TheAnalystHub.com. Over the last month we have studied over 50 companies in these two sectors combined. In terms of investment preferences, we typically look to buy low PE companies whose business fundamentals are going in the right direction. On the flip side, if the company is trading at a high PE and its fundamentals are deteriorating or expected to deteriorate, we consider it to be an ideal sell candidate. In this article we will be discussing two of our conviction buys and one potential sell candidate.
Coach, Inc (NYSE: COH)
Our Take: Conviction Buy
Coach is trading at a forward PE of 12.27x while it is expected to post a growth rate in the high teens in the long term. Thus it is significantly undervalued on a PEG basis. Coach's stock price corrected sharply after its last quarter results due to low North American SSS growth and a conservative FY13 EPS outlook. Investors are concerned that slow Q4 sales may be an indication that Coach is losing market share. However, I don't believe this is true. Factory store trends were the main reason behind Coach's SSS miss in North America while full price stores and e-commerce channels reported consistent trends versus last quarter. Since Coach's primary competitors are in full price stores, we believe it is unlikely that the sales miss has anything to do with competitors executing better than Coach. The decline in factory orders has more to do with the elimination of couponing at factory stores and the broader macro slowdown. Thus, investor concerns are unfounded. Further, the company continues to do better than expected in emerging markets like China where its growth drivers are still intact. In addition, the company has strong cash holding of $917 million at the end of the last quarter which it can use for share buybacks and to provide downside support for the stock. For our detailed article on Coach please visit Coach's Steep Stock Price Decline Makes it an Attractive Buy.
Yandex NV (NASDAQ: YNDX)
Our Take: Conviction Buy
Yandex is trading at a forward PE of 19.04x while its EPS is expected to grow 47% in the current year and 33% next year. Clearly, its PE valuation is too low for a growth company with several secular drivers. Russia is several years behind the US when it comes to online market spend to GDP ratio. As things normalize, Yandex as the market share leader in Russia would be a natural beneficiary. In addition, accelerating mobile business and a reducing capex ratio (as a percentage of revenues) are other catalysts to watch for. Further, near term trends for Yandex also seems to be going in the right direction. Yandex's O&O search growth and Display growth re-accelerated in Q2, which we believe should help lift investor's concerns about Yandex's distribution. Yandex's Q2 results were very strong, and when the stock corrected despite these good results we recommended buying it (See: Yandex Earnings: I fell to give investors a last chance to buy me ). With the stock rising ~10% in the last few days we were proved right. We believe there is still significant upside left in the stock and would recommend investors to buy it at these levels.
Yelp Inc (NYSE: YELP)
Our Take: Sell
Yelp is one company we don't like. The company is unlikely to post any profit in the near term but is commanding a market cap of over $1.5 billion. Further, we see mobile monetization as a big concern for Yelp. Failure to formulate a good mobile monetization strategy has taken a big toll on its Web 2.0 peers Facebook (NASDAQ: FB) and Zynga (NASDAQ: ZNGA). Facebook is trading in the low $20s versus its IPO price of $38 while Zynga is down ~70% YTD. Both companies have seen increasing cannibalization of PC users from mobile. Mobiles with smaller screen size present less monetization opportunity, in particular, for ad revenues. Yelp's business model is also significantly dependent on ad revenues and it is unlikely to escape from this headwind.
In addition Yelp's overdependence on Google is another big concern. Yelp derives most of its revenues from Google and any adverse tweak in Google's algorithm might affect it in a way similar to what happened with Demand Media. Further, Google itself has launched a competitive product, Google Places, which might find preferred placement in Google's search results. Along, with these fundamental concerns, Yelp's upcoming lock-up expiry will also results in downside pressure for the stock. For our detailed bear thesis on the company please visit Why Not to buy Yelp despite good Q2 results?
TheAnalystBlog has no positions in the stocks mentioned above. The Motley Fool owns shares of Coach, Facebook, and Google. Motley Fool newsletter services recommend Coach, Facebook, and Google. 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.
