They may’ve whiffed on earnings, but the fundamental thesis remains
Earnings season can be a blessing, a curse or an opportunity for investors to take advantage of drastic plunges and pick up beaten-up stocks at a cheaper prices. It’s not so easy, however, to tell the difference between a value and a money trap.
More often than not, stocks are beaten up because there’s something fundamentally wrong with the business. Other times, stocks take a hit for whiffing on earnings or failing to live up to future expectations.
That doesn’t necessarily mean the stock is a dud; it could rally and return double- or triple-digit gains!
With that said here are seven stocks that investors should consider buying after they were punished in reaction to a poor earnings report and/or concerning guidance.
Earnings Losers to Buy: Fitbit (FIT)
Fitbit Inc (NYSE:FIT) pre-announced its fourth-quarter results in late January, so the company’s earnings report in February wasn’t a shock to investors. In fact, FIT stock rebounded the day after the report, although it remains within striking distance of its all-time low of $5.62.
Fitbit communicated in its report a simple game plan moving forward: leverage data from millions of users to deliver a better experience. In other words, monetize the 23.2 million users who already bought hardware devices by selling software upgrades and other services through its own app store.
Fitbit also said it will develop upgraded versions of existing products (read: sell new products to new and existing customers) and expand into new categories (read: leverage recently acquired companies to expand into new verticals). Also, Fitbit exited the fourth quarter with $757 million in cash and investments, which means the rest of the entire business is valued at a mere $560 million. This is attractive to potential acquirers or maybe even Warren Buffett himself who recently announced an expansion into wearable.
Despite Fitbit’s obvious woes, the fact remains Fitbit boasts the largest community of activity tracker users with the best rated fitness app in the Apple Inc. (NASDAQ:AAPL) App Store and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) Google Play Store. This means the company is doing something right and needs some time to right the ship.
Earnings Losers to Buy: Texas Roadhouse (TXRH)
Texas Roadhouse Inc (NASDAQ:TXRH) reported a top-and-bottom line miss in its fourth-quarter report and a very weak comps growth of 1.2%, which for most restaurants is an impressive metric.
Texas Roadhouse was a standout in the casual dining group over the past year and boasted some of the most impressive traffic gains and comps in the entire restaurant sector.
Investors who bought TXRH stock a year ago in the beginning of January are sitting on some 30% gains — not too shabby. But that was then, and this is now. So what’s working in the company’s favor moving forward?
Beef deflation throughout 2017 will be a central theme, although, meanwhile, the company is still growing and plans on opening 30 new stores throughout 2017, of which 24 will be the core Roadhouse and six Bubba’s 33s. Also important to consider is Texas Roadhouse’s 29% corporate tax rate.
Any tax reform from the White House will provide outsized benefits to restaurants with a pure domestic exposure, i.e Texas Roadhouse.
Earnings Losers to Buy: Glu Mobile (GLU)
Glu Mobile Inc. (NASDAQ:GLUU) stock was uber-hot to kick off 2017 as it rose from around $2 and peaked above $2.50 ahead of its earnings report, which actually erased all of the stock’s gains for the year.
Glu Mobile is a developer and publisher of mostly mobile and tablet games most of which are backed by celebrity endorsements, including Kim Kardashian, Katy Perry, Gordon Ramsay and more. None of this really mattered as Glu Mobile managed to post a top-and-bottom-line beat at a time when smartphone users are more glued to their phones than ever before. But wait — the fact that GLUU stock is trading near its all-time lows makes it an attractive acquisition target for a much larger game developer.
And thankfully for investors, the mobile game market has been ripe with M&A activity with several deals valued in the billions of dollars. For less than $2 a share investors can take a chance that a much larger gaming peer with much deeper pockets can better leverage Glu Mobile’s assets.
Earnings Losers to Buy: Hanesbrands (HBI)
What happened to Hanesbrands Inc. (NYSE:HBI) is quite remarkable. From 2013 through 2015, the stock multiplied three times over while simultaneously handing out quarterly dividends to investors. But after peaking north of $30 per share in 2015, the stock declined throughout all of 2016 and now stands near $20 per share.
So how does the company see upside from here? Growing an apparel and fashion company in the current environment is tricky, but the company’s heavy reliance on M&A activity (such as Champion Europe and Pacific Brands) should continue flowing through. In fact, gross margin for the quarter rose 20 basis points to 39.6% due to a positive mix from international acquisitions which more than offset the volume impact from lower sales.
Finally, it is always a sign of confidence when a company that is in the “dog house” does one of two things: commit toward boosting dividends or buying back its own stock. In Hanesbrands’ case, the company is doing both.
Earnings Losers to Buy: GNC (GNC)
There is just one word to describe GNC Holdings Inc (NYSE:GNC): Ouch. GNC Holdings reported its fourth-quarter results, which were well below already low expectations along with an alarming 12% same-store sales decline. As if this wasn’t enough, the one thing that kept many investors on board, namely a whopping 9.8% dividend yield, was suspended.
So why would anyone invest in the company today? Well, this is a question best reserved for the company’s CEO Robert Moran and chairman Michael Hines who both disclosed large insider purchases.
Moran holds more than 600,000 shares of GNC worth just shy of $6 million while Hines’ stake of around 170,000 shares is worth around $1.5 million. Benzinga, citing sources familiar with the matter, reported that the insider purchases could signal M&A news is on the horizon. Specifically, a large shareholder at a rival firm could be pushing for a merger with GNC.
Will this happen? Maybe. If not, investors can find some comfort in the fact that GNC isn’t sitting back and watching its business fail. In fact, the company even acknowledged it was operating a “badly broken business model” and is in dire need of a change and that new change is here and called the “One New GNC.”
Earnings Losers to Buy: Target (TGT)
Strange isn’t it how Wal-Mart Stores Inc (NYSE:WMT) is in the middle of an impressive comeback at the exact same time Target Corporation (NYSE:TGT) is showing some very concerning cracks in its business.
Walmart cited initiatives such as online grocery, in-store pickup and buy online ship to store as some of the reasons for its growth, highlighted by an impressive nine consecutive quarters of traffic growth in the stores. If that is the recipe for a turnaround then investors should consider buying Target stock since this is what it is doing and much more.
Other initiatives to spearhead growth is expand on the popularity of its in-house brands with the launch of more than 12 new brands. After all, TGT showed no fear in quickly scrapping its failed foray into Canada which should give investors confidence that management can admit to its mistakes, cut losses and look at right the ship.
There is no doubt that this game-plan should have been implemented months if not years ago but this also means long-term shareholders can now buy the stock at the cheapest level it has been trading at in years.
Earnings Losers to Buy: Fossil (FOSL)
Among the seven stocks I have mentioned, making the case to buy Fossil Group Inc (NASDAQ:FOSL) is probably the most difficult. After all, the stock was traded north of $100 per share on many occasions from 2011 through 2014. But now the stock is trading south of $20 per share after the latest earnings report was dominated by poor margins, sales declines and wearables worries.
So what prospects does Fossil hold that will bring about much-needed change in the stock’s direction? For starters, the company appears to be super-focused on driving operating efficiencies and, much like Target, the company is late to the fixing-up game. But similar to Target, fixing up the company is better done late than never. If the company does see a turnaround in sales based on its hundreds of new products (and improvements on existing ones) it could be met with a notable uptick in earnings and margins.
This is no doubt a long shot and a hard sell to make, but let’s keep in mind the company is still profitable and did nearly $1 billion in revenue in the quarter. This fact alone suggests the company is badly beaten up but not dead yet.
Note: The author of this article is Jayson Derrick. As of this writing, Jayson did not hold a position in any of the aforementioned securities.
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