Market volatility has recently moved to multi-year lows, leading
to investor complacency. But it's time to sit up and pay attention
again: the Dow Jones is registering its third straight session of
150-point swings. That's great for day traders and options players,
but nerve-wracking for the buy-and-hold crowd.
But there's a silver lining. The intra-day weakness is masking some
very strong results, muting stock performance gains. When the
market has a quieter day, these stocks could power higher. However,
there are a handful names that have managed to spike far higher
today, even as the major indices stumble.
For many retailers, it's easy to post big profits during the
holiday season, but the other three quarters can see losses mount.
The challenge is to generate profits in those seasonally slower
Overstock.com (Nasdaq: OSTK)
has just done. The e-tailer posted first-quarter results that were
far ahead of forecasts, pushing shares up more than +15% to an
18-month high. The results were so strong that analysts may need to
double their 2011 profit outlook from the current consensus of
$0.57 a share.
The key question is whether the company's impressive 42% spike in
sales is a harbinger of more strong quarters, or the result of
heavy promotions. A 200 basis-point compression in gross margins
tells you that pricing was sacrificed to move the goods. But the
swing to profitability is an undeniable positive.
More than likely, this sales momentum is for real, and there is a
chance that growth could become viral. E-tailers depend on critical
mass , and strong word-of-mouth. Overstock has the critical mass in
place, and could start to become a regular destination for bargain
Shares appear reasonably priced at around 20 times likely 2011
profits (which as noted, could be far above the current consensus).
More important, moderate sales growth could yield profit growth
rates well higher than that price-to-earnings ratio (P/E), as
e-tailers have a tremendous amount of operating leverage . Even as
shares are hitting fresh highs, they should garner new
NutriSystem (Nasdaq: NTRI)
, which had lost half of their value over the last five months, are
back on the upswing today, posting a +20% gain. The purveyor of
diet supplements boosted marketing efforts to woo new customers.
And that paid off handsomely, as sales grew even faster than those
But investors need to temper their enthusiasm, as this industry has
fully matured and represents very few growth prospects. Shares at
about 17 times next year's profits are no bargain.
Cardinal Health (
must be kicking themselves. They decided to spin off the company's
CareFusion division "to unlock shareholder value." But
is now posting moderate growth at a time when Cardinal is set for
flat growth in fiscal 2010 ending in June. Shares of CareFusion are
up another 5% today, and are up more than 70% since last summer's
Shares of Cardinal have also risen, albeit at a lesser pace. And
although CareFusion may have snared recent plaudits, Cardinal
health may be the better play in the quarters ahead. I wrote about
Cardinal Health's turnaround efforts in this piece in February.
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.