After falling 6% in August and another 7% in September, the pall
lifted over the
and the S&P 500 managed to rebound nearly 10% in October. Many
stocks have ridden this upturning wave to surge two or three times
this amount. But as the October rally fades with the close of the
, some of these big gainers may be hit by a wave of profit-taking.
I've looked for all of the stocks in the S&P 500 that have
risen at least 30% since the beginning of October, excluding any
names that have agreed to be acquired or have a
below $300 million. Some of these recent gainers have real
tailwinds in place and could easily move higher.
Among these names, two stocks look more vulnerable. Their next move
could be downward, especially if the November market action isn't
nearly as supportive as we've seen this month.
1. Fusion-io (NYSE:
With customers such as
and Facebook, this provider of flash-based storage has created a
considerable amount of buzz. Its technology sits right inside
powerful web servers, sharply reducing the time it takes to cycle
through large data sets. Rising demand for its storage devices
helped Fusion-io boost sales more than 400% in fiscal (June) 2010
(to $197 million). Sales are likely to hit $300 million in the
, according to analysts.
have been surging since early October, when the company released an
upgraded version of its core product that can pore through data
sets at an even faster pace than prior models. Barron's also
published a flattering profile of the company on Oct. 22, which
accounts for the most recent upward move in the stock.
Yet a big problem looms: rivals such as
are preparing their own rollouts of flash-storage devices, and they
have much deeper and long-standing customer relationships.
(Privately-held players like Nimbus Data and Pure Storage are also
gaining traction in the market). "[The company's] products are too
expensive and competitors will soon undercut Fusion-io with pricing
that are half to 1/6 of Fusion-io prices, " predicts Merriam
Capital's Kaushik Roy, who says the stock will ultimately fall more
than 50% into the low teens.
The looming competitive threat is a concern for 2012 and beyond.
Near-term investors need to guard against a quarterly stumble, as
is often the case with newly-public companies. The first quarter as
took place in June 2011) is often a good one, since companies are
careful to prevent any post-IPO stumbles that can kill long-term
credibility. But the lofty expectations during the second quarter
and beyond can be a millstone.
Considering this stock now trades for roughly nine times projected
2012 sales and 200 times projected 2012 profits, one false move
could send shares tumbling. As a comparison, rival
trades for just in line with projected 2011 sales, on an
basis. Sterne Agee says shares could fall to $17 from a current $32
when competition finally starts to bite. Analysts at Auriga, who
say shares will fall back to $16, predict quarterly results will be
solid when they are released on Nov. 2. Yet it's the subsequent
quarters that may spell trouble, according to Auriga, since
potential customers hold off ordering as they review new-to-market
products from EMC,
OCZ Technology (NYSE:
and others. Auriga's basic premise is clear: Fusion-io "is a very
expensive stock any way you try to spin it." They suggest Barron's
profile fundamentally misread and vastly overestimated Fusion-io's
total market opportunity.
2. Liz Claiborne (NYSE:
Companies often deploy a hefty amount of debt to gain a tax-shelter
as interest payments are expensed. But in cyclical businesses like
retail, too much debt can be a real problem. Retail and apparel
firm Liz Claiborne had lost money every year since 2006, and
realized this year that it was time to shed assets and remove a
. Mission accomplished: Liz Claiborne sold the rights to its Dana
Buchman, Mac & Jac, and Monet brands for a collective $328
million earlier this month. This should take
from about $500 million to a healthier $200 million. Investors
cheered the move, pushing the stock up from $4.50 to $8 in October.
Trouble is, the company's remaining assets -- a collection of
brands such as Kate Spade, and roughly 800 stores in the United
States, Canada and Europe -- may not be worth as much as the share
price implies. Management recently issued updated
guidance, which Merrill Lynch's analysts parlayed into
) forecasts. They say Liz Claiborne will earn just $0.30 a share
next year and figure the stock deserves to trade at 13 times this
forecast. Their $4
implies a 50% fall for this rebounding stock.
Risks to Consider:
If October's impressive rebound can be sustained into November
and December, then these momentum stocks could surely stay aloft
and rise even more. It would take a flat or down market to take the
wind out of their sails.
Action to Take -->
We're back into a steady rhythm in the markets: August and
September weakness unveiled clear buying opportunities, whereas
October opened the door to book quick profits. Riding the ebb and
flow of these trading cycles may be the theme for the coming
months, as investors cycle back and forth between pessimism and
optimism. These stocks are surely the beneficiary of newfound
optimism, but may not hold up if and when this optimism fades.
-- David Sterman
P.S. -- Thankfully, other types of stocks can give you a good
night's sleep by not having to worry about the stock market's wild,
day-to-day swings. If you're interested in learning more about
"forever stocks," then you should check out Paul Tracy's special
presentation, "The 10 Best Stocks to Hold Forever."
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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