Investors looking to score big gains should always pay attention
to the retail sector. Not the top retail stocks that seem to pound
out modest sales gains each year, but the weaker retailers that
have hit a rough patch. These retail firms could seeshares slide
far below prior peaks once same-store sales weaken and investors
shun them.
Yet these broken retailers can also become vastly oversold --
and great bargain-hunting fodder. For example,
I suggested that
women's apparel retailer
Christopher & Banks (NYSE:
CBK
)
was far too cheap -- based on tangiblebook value and sure enough,
the stock eventually took off like a rocket. In fact, a number of
oversold retailers make up the list of leading gainers in the just
completed third quarter.
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In almost every instance, these retailers had traded sharply
lower in prior quarters, which is precisely the time that you
should be focusing on them. Whether it's abuyout offer , or simply
aturnaround in same-store sales trends, the room for upside is
considerable once the crowd pivots back toward these broken down
retailers.
Other big gainers
The third quarter wasn't only kind to the retail sector.
Homebuilding stocks were scorching hot, led by big gains in
KB Home (NYSE:
KBH
)
and
PulteGroup (NYSE:
PHM
)
. But as
I recently cautioned
, this rebounding sector could easily cool down in 2013 as
theeconomy remains weak, before heating up further into mid-decade.
So if you own these stocks, then you may need to be prepared for a
near-term pullback before they eventually move up to their cyclical
peaks.
The wireless service sector also posted solid gains. An
increasingly optimistic view of
Sprint (NYSE:
S
)
,
which I profiled during the second quarter
, helped this stock to post huge third-quarter gains. I wouldn't be
surprised to see Sprint move past the $6 a share mark in coming
weeks on the heels of another solidquarterly report , but further
big gains appear unlikely.
The same can be said for
MetroPCS (NYSE:
PCS
)
, which nearly doubled in the second-quarter on hopes of a buyout
from Sprint or another player. Just this week, rumors have
suggested that T-Mobile may be looking to acquire metroPCS, pushing
the stock nearly 20% to a fresh52-week high . After that kind of
move, it's hard to see how any buyout offer would come much above
the current price.
So which top third-quarter performers should investors be
looking at now?
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SkyWest's accretive buyback
Although many companies announce buyback plans, you should mostly
be paying attention to only one kind of buyback: Any plan that is
done while shares trade for less than tangible book value. That's
because a "below book" buyback instantly boosts book value per
share for every share retired.
Let me explain...
Regional airline
SkyWest (Nasdaq:
SKYW
)
currently trades at around $10.50 a share and has tangible book
value of $25.71. The airline plans to buy back 6.5 million shares,
shrinking the share count around 12% to roughly 45.3 million. This
should actually boost book value per share to $29.40. Rising book
value per share, thanks to this accretive buy back, is a sure sign
of a buyback's value. And it makes this stock's current value a
deep bargain.
The best solar stock in the block
Much ink has been spilled about the meteoric rise and subsequent
fall for clean energy giant
First Solar (Nasdaq:
FSLR
)
. By the time I wrote about the company
five months ago
, it appeared as if the stock had hit bottom, and according to
analysts at Merrill Lynch, had morphed into a deep-value play.
Shares initially continued to slide after that, but have since
posted a quite solid rebound.
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As I cited the opinion of Merrill Lynch analysts back then, it's
worth checking in with them again, now that shares are back up in
the low $20s. They recently sat down with management and concluded
that despite the solar industry's deep pressures, the company's
multi-pronged approach to solar panel production and solar-power
generation contracts sets the stage for "stable operating margins
in the 10% to low teens range," according to the analysts. That
works out toearnings power of about $4 a share. And if that's the
case, then this stock is still too cheap. Merrill's analysts say a
$30price target is appropriate, perhaps setting the stage for a
second straight quarter of robust gains.
The company's decision to pursue major utility contracts now
looks wiser, as it should being in amplecash flow during the next
few years. "It seems apparent to us that First Solar is going to be
in a position of increasing financial strength during the coming
six to eight quarters as the company monetizes its existingbacklog
of business. That gives First Solar maneuvering room to try and
keep its panel costs dropping, while most of the competition
struggles to cope with deteriorating cash flow and weakening
balance sheets," noted the analysts. In effect, this should be the
best house in an increasingly bad neighborhood.
Risks to Consider:
These stocks surely were aided by an ever-rising stockmarket ,
so a market reversal may make it hard for them to keep
rallying.
Action to Take -->
Even though a few of these stocks look especially appealing, you
should track all of the stocks on the table above. Quick gains
often lead to profit-taking, which may set up a buying opportunity
for these rejuvenated businesses as their shares consolidate.
-- 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.