It's official: The stock markets are now in acorrection . At
least the Nasdaq is, having fallen more than 10% from its52-week
high (it's more than -10% right now). The challenge
withmarket corrections is that they can turn into bear markets
(abear market is defined as a 20% drop from the peak).
Indeed there are ample reasons for continued caution,
as I noted a month ago
Yet even as the market is getting weaker, clear values are
starting to emerge. And for many, the time is at hand to start
building new positions in stocks that appear to have been unfairly
tarnished in this sell-off. Indeed, a surprising number of
companies that are still being pushed lower in this tough market
have reported estimate-beating third-quarter results and solid
forward guidance. Here are four examples...
1. Leapfrog (NYSE:
Q3EPS outperformance: 43%
This maker of tablet computers that focus on child-oriented
"edutainment" is seeing clear momentum heading into the holiday
season. Management recently predicted that 2012 sales would rise
about 20% to roughly $550 million. Analysts parlayed that guidance
into a 20% boost in their 2012earnings forecast to about 80 cents a
share. They boosted 2013 sales andprofit forecasts at a more modest
Yetshares have fallen roughly 15% since Leapfrog results were
reported last Monday, Nov. 5, perhaps because management also
intends to hike marketing spending. Leapfrog may also be suffering
from a perception that rivals (such as Toys 'R Us, which is selling
its own product) may eat into sales. But the raised forward
guidance suggests that competitive fears are overblown.
The fact that shares have now fallen 30% from the 52-week high
and now trade for around 10 times projected 2012 profits has
created a fresh entry point for investors.
2. Cubist Pharmaceuticals (Nasdaq:
Q3 outperformance EPS: 19%
This company currently sells a pair of drugs that target bacterial
infections, and three more promising drugs are in the late stages
of its clinical pipeline. Sales grew around 15% in 2010 and 2011,
and are on track to rise roughly 20% this year to more than $900
million. Merrill Lynch's analysts predict sales could approach $1.2
billion by 2014.
Shares of Cubist made a strong upward move -- from $38 in late
June, to around $50 -- and the recent third-quarter results may
have simply been a reason for investors to book profits. Shares are
off nearly 15% since results were released on Oct. 18 to a recent
$41. Merrill Lynch figures shares will move toward their $56price
target as we get closer to another round of Phase III clinical
trials slated to get underway in early 2013.
3. Sandisk (Nasdaq:
Q3 EPS outperformance: 45%
This maker of data memory products posted stellar third-quarter
results, and analysts subsequently boosted their 2012 and 2013
sales forecasts. In fact, this is one of the few semiconductor
companies that hasn't delivered downbeat forward guidance. Still,
the negative sentiment toward the sector as a whole has kept this
stock from rallying after earnings. Shares have fallen roughly 7%
since third-quarter results were announced.
The reason why analysts have boosted forecasts: The NAND market,
which is SanDisk's primary focus, is now characterized by a healthy
balance between supply and demand, which should enable pricing to
stay firm. The recent pullback has left shares trading at 12 times
projected 2013 profits.
4. AthenaHealth (Nasdaq:
Q3 EPS outperformance: 15%
that this stock looked ripe for a sharp pullback. Indeed shares are
now off nearly 40% from their 52-week high.
Why did shares tumble after this maker of digitized health
records delivered estimate-beating third-quarter results? Because
management noted that some of the business expected to land in the
fourth-quarter came early, so they took down this quarter's sales
and profit guidance by a corresponding amount. The company also
concedes that its target markets are growing more competitive.
Still, analysts' estimates for all of 2012 have remained largely
intact. Analysts still expect sales and profits to grow more than
25% in 2013.
AthenaHealth is shaping up as a prime beneficiary of
recently-passed Affordable Health Care Act, as hospitals and
physicians will be pushed to put down the pen and paper, and pick
up the computer (or tablet as the case may be).
This is a case of high-growth stock falling victim to
unrealistic growth projections. Yet with those expectations now
sharply reduced, investors are no longer shouldering that burden.
Indeed it's always wise to focus on high-growth businesses only
when they have temporarily fallen out of favor.
Risks to Consider:
These stocks may be hard-pressed to rebound while the market
stays in a funk.
Action to Take -->
Earnings season is a fertile time to seek out good companies that
are saddled with bad stock prices. A falling market tends to punish
stocks of all stripes, so if the market grins lower for here, you
need to step up your research efforts to find good companies that
are "on sale."
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.