From: Nicole Urken
Sent: Tuesday, August 07, 2012 10:56 AM
To: James Cramer
Really amazing price action after the quarter up over 30%. Remember in May, stock was cut in half after missing estimates. And expectations were very low after the COH earnings. The fact that FOSL beat, even though they issued downside guidance (largely baked in) has made investors cheer. This good for KORS too and suggests accessories potential bottoming.
From: Nicole Urken
From: James Cramer
Sent: Tuesday, August 07, 2012 11:48 AM
To: Nicole Urken
Subject: RE: FOSL
Again-beaten up enough to rally. TUMI and FOSL. CMG is like that too.
As we continue to comb through the many companies that reported this past quarter, we see that many of the names that surged the most were the most beaten down running into the quarter.
Just on Friday, we saw JCPenney , a universally hated company on Wall Street that has been beaten down ever since the initial pop following Ron Johnson’s newly minted turnaround initiatives, actually was in the green after posting dismal comparable store sales of 21.7 percent! Why? The bad news was expected. And Johnson’s ideas and dynamic commentary on the conference call also helped to boost the name. Not to mention that Pershing Square’s Bill Ackman holds 18 percent of shares. Yes, turnaround will take time, but with initiatives in place and a heavy handed investor in the game, there was not much room for downside coming into the print.
Fossil is case-in-point of this “hated enough to surge” trend. After this growth name reported a disappointing first quarter on May 8, causing the stock to drop from $125 to $78, sentiment was extremely low coming into the second quarter reported on Tuesday. Downbeat results from another strong accessories name, Coach, the prior week along with acknowledged European worries didn’t help much either. So when Fossil managed to squeak out a beat, even the downside guidance couldn’t hold back shares— which rose from $69 and change to over $91 in a single session.
Certainly, an accelerating topline and better-than-expected gross margins helped fuel this global name. But the stock surge ultimately boiled down to sentiment and valuation. Into the quarter, Fossil was trading at 11x forward P/E with a 19 percent long-term growth rate. It no longer was trading at the “nose bleed” growth valuation levels it held leading into the previous quarter, and strong comps in Asia and North America outweighed continued pressure in Europe.
Accessories peer Tumi Holdings also posted a significant surge (up 23 percent) after posting an in-line number on Monday after the close. This was a “hot” IPO, surging almost 50 percent in its first day of trading from its $18 pricing in April but has disappointed ever since. The company remains an early stage growth retailer with much upside form Asia in particular, as reiterated in the latest earnings conference call. As another name that boasts a high valuation, the stock will trade based on ability to outperform versus sentiment, which had come down of late.
The other “losers” that became “winners”?
Devon Energy: This domestic exploration and production (E&P) company continued its downward trajectory after it posted its quarter on August 1st, dropping from $59 to $55, but it has since rebounded to above $60. Why? Low nat gas prices are finally baked in and investors see coming in at the lowered levels compelling, particularly as this name continues to shift away from gas and into oil projects—a trend we’ve seen from many of the domestic E&Ps. Not to mention a positive joint venture announcement with Sumitomo that will accelerate more oil projects and continue the Devon transformation .
Akamai : This company, which works to speed up and improve the delivery of content and applications over the internet, boasted a strong quarter that was met with a 24 percent surge in the stock. Of course, this was preceded by a drop from $38 at the end of April to $28 leading into the report. Strength in cloud revenue helped boost results, but this name remains precarious after several volatile quarters—would stay on the sidelines after the surge. While the company continues to shift into higher margin value-added services, much remains reliant on the core content delivery network (CDN) which is a more commoditized business.
Western Digital: This hard disk drive play surged 21 percent on the day of its quarterly report at the end of July, where its EPS beat was driven by better pricing and gross margin. Ultimately, Western Digital and its peer Seagate are trading vehicles, as gross margins can change so quickly based on supply and demand. Pricing concerns remain front and center going forward, particularly as PCs are in secular decline. The shareholder friendly initiatives of both names (both from a dividend and buyback perspective), along with attractive valuation, have kept many investors in the names, but tread carefully with these.
Tractor Supply: This company, which can be thought of as the “rural home depot,” had been in free fall from the end of May at $100 to udner $80 earlier this summer on worries about the drought and moderating consumer spending. But, low and behold, the stock surged to 16 percent to $92 and change after its report on July 25 as the company delivered an “OK” report despite headwinds (and the downside guidance was anticipated). This stock remains well positioned long-term with store growth in a fragmented market, drought pressures largely in the past, and easy upcoming comps with recent positive sales trends. Plus, this growth name is U.S.-based (domestic security!).
In industrials? Eaton, which was pushed down by macroeconomic worries and concern over its leverage to the truck bull market, surged after its better-than-expected report in late July. Cummins has also rebounded nicely since its very downbeat preannouncement back on July 10 when it fell from $95 to $86. It is now above levels before the downside guidance, as expectations and growth estimates were reset. Emerson too has had a stellar run since it lowered 2012 guidance back on June 26, with strength in trends confirmed by its second quarter report earlier this week.
Allscripts-Misys: We put this healthcare IT name on the sell block back in March. The stock had a huge sell off at the end of April, causing the stock to drop from $16 to under $10. The recent post-quarter rally is largely a relief rally, and I would not come into this name here, particularly as it is disadvantaged versus peers like Cerner .
Riverbed: Riverbed, which is a leading provider of WAN optimization solutions — i.e., enabling companies to improve performance across networks — surged after its report in June and an announcement of a license deal with Juniper. This was an upside surprise after multiple quarters of disappointments that reflect slowing of its market — due to the adaptation of protocols to the cloud, “webifaction” of applications and growth in virtual desktop deployments. We are starting to see a shift in sentiment here but this volatile name is not for the weak of heart.
Stocks that have been left for dead can continue to surge after posting improving results.
Just look at Sprint, where everyone given up hope at $2 over abounding worries about the company’s Network Vision execution, spectrum constraints, and competitive pressures. The post-quarter surge has continued as the turnaround under Dan Hesse continues. Sprint, the only major wireless provider that offers unlimited data, now has the iphone in its repertoire. Plus, as the company is successfully shutting down its Nextel network (freeing up spectrum while looking to maintain the customers!) — an important catalyst. While the stock gained some momentum in June, it surged 20 percent the day of its quarterly report and has continued to rise since then because expectations had just gotten too low. This is an interesting name to come into on any pullback as the tides are starting to turn.
The bottom line: When expectations are reset, stocks can surge if trends look like they are shifting. A good earnings season lesson. But remember to differentiate the ones that mark a turn with long-term opportunity a la Emerson or Tractor Supply and ones that still pose downside risk like Fossil at these elevated levels.
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