Each Friday we highlight the most compelling investment ideas
that our research has uncovered from the 30 or so stocks that made
it into our daily "winners" and "losers" write-ups during the
Perfect World (Nasdaq:
Investors jumped into China-related stocks on Monday, looking for
companies that would benefit from a stronger yuan and/or more
robust Chinese consumer spending. Perfect World was seen as a play
on that latter factor, and shares
rose sharply Monday morning
But after briefly touching $26 mid-day on Monday, they've been in
freefall since, trading down to $22. There's no good reason for the
sell-off, though as we've noted before, Chinese gaming stocks may
not be very timely as the industry is going through one of its
once-every-few years no-growth modes. The industry -- and Perfect
World -- are suffering from a dearth of hot new titles at the
moment. The company's quarterly earnings per share have been flat
in the $0.70 to $0.80 range during the past four quarters. And it
probably won't be until the December quarter before they bust out
of that range.
But over the long-haul, this is still a growth story. That's
because Chinese Internet penetration remains low, but is growing at
a very fast rate. During the next ten years, the size of the
potential Chinese gaming market could double.
Action to Take -->
Meanwhile, investors should take comfort in rock-bottom valuations.
Shares trade for less than seven times 2010 projected earnings,
which by the way, should grow another +20% next year, to around $4,
according to consensus forecasts.
Jabil Circuit (NYSE:
Shares of electronics parts maker Jabil Circuit failed to rise
further after a nice
earnings-related surge on Wednesday
The lack of follow-through may be due to the fact that earnings
estimates have barely budged since the company issued blowout
earnings and guidance. But we remain convinced that 2011
estimates need to rise from the current $1.65 to around $2. But we
are also convinced that investors are shunning all tech stocks for
fear that Europe will melt down. Jabil is one of many tech stocks
that are poised for solid growth and trade on the cheap.
Action to Take -->
Few tech stocks are this cheap. A
price-to-earnings ratio (P/E)
of seven usually implies that earnings are at the top of the cycle.
But in this case, the cycle may just be getting going, and
per-share profits could rise another +20% to +30% in 2012 if recent
growing tech trends stay in place.
Bed, Bath & Beyond (Nasdaq:
While Jabil and Perfect World appear to possess considerable
upside, their global exposure presents a bit of risk. Investors
searching for upside with a safer domestic focus should check out
Bed, Bath & Beyond, which
got hit hard this week
after issuing seemingly disappointing guidance.
Shares are bumping along six-month lows, even as this retailer
should still earn well more in 2010 than investors expected six
months ago. Management gloom-and-doom is par for the course. If you
take a deeper look at operations, you'll see that the retailer only
needs to post small same-store sales gains to boost earnings growth
above the +10% mark. An eventually strengthening consumer should
push those metrics even higher.
Action to Take -->
Bed, Bath & Beyond saw the economic downturn put a key rival
(Linen's & Things) out of business. The market for home
furnishings may not be growing very much, but BBBY can now control
a larger slice of that market. As unemployment drops in subsequent
years, sales and profits should keep rising. Forget management's
dour near-term view. Focus on the bright long-term.
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.
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