Call it the winner's curse. When companies grow at fast clip for
a long time, investors come to assume they'll never slow. Of
course, all companies eventually grow too large to keep posting
explosive growth. Some settle into a more moderate -- but still
respectable -- plane of growth, while others truly hit a wall.
We went trolling for these high growers, focusing on the technology
field, to see if there is any life left in these former highflyers.
We specifically screened for companies that have boosted sales at
an average annual pace of +25% or more during the past five years,
eliminating any companies valued less than $200 million.
We culled the list further to focus solely on companies that have
seen their stocks fall to a point lower than they were a year ago.
This tells us that high-growth investors no longer love these
names. But do they appeal to investors seeking moderate growth and
reasonable valuations? Let's find out.
5-Year Revenue Growth
July 30, 2010 Price
52-Week Price Change
2010 Sales Growth
|Canadian Solar (Nasdaq: CSIQ)
|Research In Motion
|VASCO Data Security
Research in Motion gets no respect
No major tech stock has gone more quickly from hero to goat than
Research in Motion (Nasdaq: RIMM)
, maker of the Blackberry smartphone. This was possibly one of the
great growth stories of the last six years (when sales grew
anywhere from +35% to +127% in any given year), but
Apple's (Nasdaq: AAPL)
stunning success with the iPhone and the iPad have led investors to
think RIM's days of growth are over. And they ran as fast as they
could, pushing shares down from above $80 last September to below
$50 in early July (before a recent rebound to $56).
Concerns of a massive slowdown in sales appear to be overblown. In
the most recent quarter, sales rose +24% from a year ago, while
profits rose +23%. The company added 4.9 million net new
subscribers to its service, and now has a hefty 46 million
customers. Admittedly, the customer base for the iPhone and
Google's (Nasdaq: GOOG)
Android phones are growing even faster, so
is slipping. Apple is now nipping at RIMM's heels with 16.1% market
share, while RIM's share fell to 19.4% in the first quarter from
20.9% a year ago, according to IDC, an industry research group.
But management has just announced plans to fight back, unveiling a
smartphone that has many iPhone like features and also plans to
release a tablet computer to rival the iPad. And to defend its
stock, RIM recently announced another share buyback, which in
conjunction with a just-completed buyback, would cut the share
count by -10%.
Most analysts are taking a dim view of RIM right now, but analysts
at Needham & Co. remain supporters, noting that this is "a
stock that investors now love to hate." They add that "RIMM has
several things going for it. A new operating system and browser due
by September, and the most efficient network, which should play
well as usage-based pricing takes over the market."
Action to Take -->
RIM is still posting solid growth. The fact that shares now trade
for around 10 times fiscal 2011 earnings says that investors expect
growth to sharply slow or stop completely. That's an overly bearish
view. Apple and Google are surely very tough rivals, but RIM should
also remain very relevant -- and increasingly profitable, for some
time to come.
Fast, loose and out of control
Fast-growing companies can occasionally become so obsessed with the
top-line that they lose sight of fundamental operational controls.
That appears to be the case for
Canadian Solar (Nasdaq: CSIQ),
which was one of the hottest stocks in the clean energy space --
until the wheels fell off.
Sales at this solar panel maker had zoomed from $20 million in 2005
to $700 million by 2008. And although sales flattened last year,
they are expected to surge anew this year to more than $1 billion.
At the start of the year, shares briefly moved up above the $30
mark. And then the perfect storm hit. Shares drifted back into the
$20s on concerns that demand for new solar power equipment would
slump in 2010. Then weak first quarter results pushed shares into
the teens. Finally, the company admitted in early June that an SEC
investigation would likely lead to a re-statement of fourth quarter
results. These days, shares can be had for around $12, roughly -60%
off those January trading levels.
Despite all those issues, this still looks to be a solid long-term
growth story -- once the dust settles. After all, Canadian Solar is
back in high-growth mode thanks to recent capacity expansions and
an upturn in solar panel pricing. And by some accounts the SEC
investigation and expected fourth quarter restatement is expected
to be a one-time event and will not impact revenue projections.
Management recently raised full-year sales guidance.
Equally important, the bottom-line should rebound in 2011, with
bumping back up to $1.50. (Profits are being constrained this year
while industry demand catches up with supply -- a situation which
is expected to reverse in coming quarters).
Action to Take -->
Analysts at Wells Fargo are virtually alone in their support for
Canadian Solar right now. In mid-July, they raised their rating to
Outperform, expecting that recent
concerns will soon be resolved. They also boosted their 2011 EPS
forecast to $1.99 -- well above the $1.50 consensus.
It's unclear what kind of multiple this stock deserves with its
litany of missteps. But if per share profits can indeed rebound to
$1.50 or $2.00 in 2011 and you slap a target
ratio of 10 times projected profits, then shares would trade up to
$15 to $20 -- well above the current $12 price.
-- David Sterman
David Sterman has worked as an investment analyst for nearly two
decades. He started his career in equity research at Smith Barney,
culminating in a position as Senior Analyst covering European
banks. David has also served as Director of Research at Individual
Investor and has made numerous media appearances over the years,
primarily on CNBC and Bloomberg TV. David has a master's degree in
management from Georgia Tech. Read More...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.