The Unusual Suspects for the Week Ahead (BKS, BRCD, CSKI, CIEN, FNFG, NAL, GENZ, SNY, LULU, ID, NFLX, NE, PBR, RTN, SKS, TTWO, THQI, CALL)September 4, 2010 by Jon C. Ogg
The cast of characters in this week’s Unusual Suspects is not any ordinary group of companies. There are many key stocks to watch for investors that have carryover issues from last week or which have upcoming events for the week. There is a lot happening considering that earnings are quiet and considering that this is Labor Day Weekend. Key stocks to watch going to be Barnes & Noble, Inc. (NYSE: BKS), Brocade Communications Systems, Inc. (NASDAQ: BRCD), China Sky One Medical, Inc. (NASDAQ: CSKI), CIENA Corp. (NASDAQ: CIEN), First Niagara Financial Group Inc. (NASDAQ: FNFG), New Alliance Bancshares Inc. (NYSE: NAL), Genzyme Corporation (NASDAQ: GENZ), Sanofi-Aventis (NYSE: SNY), Lululemon Athletica Inc. (NASDAQ: LULU), Netflix, Inc. (NASDAQ: NFLX), L-1 Identity Solutions, Inc. (NYSE: ID), Noble Corp. (NYSE: NE), Petroleo Brasileiro (NYSE: PBR), Raytheon Co. (NYSE: RTN), Saks Incorporated (NYSE: SKS), Take-Two Interactive Software Inc. (NASDAQ: TTWO), THQ Inc. (NASDAQ: THQI), VocalTec Communications Ltd. (NASDAQ: CALL), and Vonage Holdings Corporation (NYSE: VG).
We have compiled information on the catalyst for each stock, an outlook where applicable, added in color for traders where applicable and given specific news and background data on each situation.
Barnes & Noble, Inc. (NYSE: BKS) is turning into a nasty proxy fight as billionaire Ron Burkle is appealing a poison pill anti-takeover measure from the company as his 18.8% stake (second highest behind Riggio) as he is trying to install 3 directors next month. Here is the obvious… Burkle needs to either cry uncle or he needs to go split a fifth of scotch after a round of golf with Riggio and they can work out a fair price. Being an activist in a closely held company is not the smartest of targets, even for billionaires. Friday’s CALL options trading was “off the charts.”
Brocade Communications Systems, Inc. (NASDAQ: BRCD) was one of this week’s “stocks that could double” that we prepared for InvestorPlace.com. The current catalyst is the post-3PAR interest after HP beat out Dell as the companies fight for more unified offerings between networking and storage now that Cisco has declared war on that lineup of billions in revenues. This highlights Brocade now that it has merged with Foundry and sets this up t be the low-cost provider or “the poor man’s Cisco” for Dell, HP, IBM, or a whole host of other companies that need to fend off the Cisco threat. With a $2.5 billion market cap, its market cap is now only 25% more than 3PAR and it is expected to have about 9-times the equivalent revenues (almost $2.1 billion) for the year as a standalone player. If the tech consolidation continues, this is a highly viable candidate for a buyer to compete against Cisco on price. The company’s big problem is that on a standalone basis it just can’t stand up to much of the larger competition and that gives it very choppy results.
China Sky One Medical, Inc. (NASDAQ: CSKI) got crushed after lowering guidance due to: “Management’s reduced guidance reflects the termination of relationships with certain private distributors, who after several rounds of discussions, chose to end their cooperation with the Company after learning that their business information was disclosed in the Company’s public SEC filings and would continue to be disclosed in such documents as required by SEC regulations… has led to increased scrutiny of their financial performance by government authorities within China. “ The integrated Chinese pharma player lowered 2010 revenue guidance to $128 to $136 million versus a prior target of $160 to $164 million; lowered 2010 adjusted net income guidance to $26 to $31 million from $40 to $41 million. China Sky One became China Die One as shares fell a sharp 27.76% to $7.00 in the after-hours session on a sharp 187,000 shares after the 4PM bell. This marks a 52-week low under the prior range of $8.82 to $25.45. Ouch.
CIENA Corp. (NASDAQ: CIEN) is on deck for earnings on Wednesday morning. The communications equipment and systems company is at $13.29 and the 52-week range is $10.53 to $19.48. A portfolio manager just labeled it as a new technology providing long-term value for investors. Thomson Reuters has estimates of -$0.33 EPS and $387.04 million in revenues.
First Niagara Financial Group Inc. (NASDAQ: FNFG) is something that just does not make sense at the current time. The bank is acquiring New Alliance Bancshares Inc. (NYSE: NAL) and this will set it up to be the next potential super-regional bank. Shares hit yet another 52-week low of $11.23 this last week before closing out the week at $11.80 versus a 52-week range of $11.23 to $14.88. On a forward earnings basis, its multiples are neither dirt cheap nor excessive. What is a mystery is that the Attorney General from Connecticut is probing this merger. New Alliance trades at an implied discount to the 1.1 shares, but the arbitrage is harder to play because the merger may be stock or it could be cash and stock. Our angle here is on First Niagra, as it has been a safer bank that does not have all of the same baggage as many of the other big boys. Even with the concern of CT-state charters versus Federal charters, the AG probe just doesn’t make much real sense.
Genzyme Corporation (NASDAQ: GENZ) closed down 0.44% at $70.49 and is still above the $69.00 implied buyout price from Sanofi-Aventis (NYSE: SNY). Reports from both Bloomberg and IBD indicate that CEO Henri Termeer may be close to capitulating and accepting a buyout. Our guess is that Termeer is probably telling them, “Please just offer $1 or $2 more so we look good to our holders who are stuck in Genzyme at slightly higher prices.” This saga may soon come to an end. After all, Sanofi has bragged over and over that it has the cash. It can afford another buck, or two, if it wants.
Lululemon Athletica Inc. (NASDAQ: LULU) has earnings this coming Friday morning. The Canadian yoga-inspired apparel and destination store owner was the IBD #1 for a long time and shares have since slid as growth concerns have moved from a concern to reality. At $35.11, the 52-week range is $19.42 to $46.49. Thomson Reuters has $0.24 EPS and $145.66 million as consensus; for Jan-2011 the fiscal estimates are $1.16 EPS and $636.2 million for revenues. With a share price of $35.11 and a $2.5 billion market cap, the forward ratios are 30-times earnings and almost 4-times revenues.
L-1 Identity Solutions, Inc. (NYSE: ID) is said to be close to a buyout, and some are calling for a $1 billion valuation for the identity protection and security ID company. The question is whether the $432 million in long-term debt is a part of that $1 billion or not. At $8.99, the market cap is $837 million and the 52-week trading range is $5.67 to $10.42. Trading volume was nearly three-times normal volume with over 3.1 million shares traded. There was also an explosion in call option volume in September and October expiration dates around the $10.00 and $11.00 strike prices.
Netflix, Inc. (NASDAQ: NFLX) is a rocket ship over and over. It sells off when the market sells off, but then it slingshots higher when the market rallies. Investors Business Daily gave it the pole position yet again, in the IBD 100 followed by ARUN as #2, BIDU as #3, and PCLN as #4. The love and interest behind Netflix has been rather unique and amazing and at some point the valuations have to come into play. When that is, who knows, but the market cap is now $7.25 billion and it trades at nearly 50-times 2010 earnings estimates now.
Noble Corp. (NYSE: NE) was given a Barron’s feature this weekend titled Offshore Drilling, the Right Way… “Hurt by the fallout from the Gulf disaster, deepwater driller Noble may hit bottom. Get ready for a gusher… If there’s a will to get at that oil, there’s a way: deepwater drilling companies like Noble…” Oil stocks almost always revolve around the real oil price, but this could offer it a decent pop on Tuesday as long as overseas markets don’t fall apart on Monday and as we come back on Tuesday in the U.S. At $32.70, its 52-week trading range is $26.23 to $45.60.
Petroleo Brasileiro (NYSE: PBR), or Petrobras, is now clear for a huge stock offering that to the best of our knowledge will mark one for the record books. Our own Paul Ausick gave a full rundown for this late on Friday. Friday’s options trading showed that PUTS traded more than 3-times normal volume with about 32,000 contracts and CALLS traded nearly 3-times normal volume at about 33,000 contracts.
Raytheon Co. (NYSE: RTN) was featured positively in Barron’s over the weekend as Raytheon’s Not-So-Secret Weapon: “With ties to thousands of military, espionage and homeland-defense projects, the company isn’t likely to be slammed by single massive defense cuts.” Contrarians have been making the same case, and shares at $45.67 are still only about $3.00 off of fresh lows as the 52-week range is $42.65 to $60.10.
Saks Incorporated (NYSE: SKS) is the latest of the retailers that is rumored to be an acquisition target for private equity. There are three issues here that we have concerns about. First is that this rumor has come up over and over in the past and Carlos Slim would need to be a part of the deal. Second, Neiman Marcus was bought by private equity and the results have been very mixed and frankly the luxury experience is just no longer the same. Third, a downgrade from JPMorgan this week highlighted that it is a prudent exit point as the $8 to $9 range seems more likely than an $11 figure thrown out this last week. The $8.11 close compared to an intraday high of $8.85 but this was still up 21% this last week.
Take-Two Interactive Software Inc. (NASDAQ: TTWO) was a screamer with a 7.35% gain to $9.50 on Friday versus a $7.00 to $12.57 range over the last year. This stock may not be fixed, but it is highlighting the video game sector. Most importantly, this features THQ Inc. (NASDAQ: THQI) and our call over at InvestorPlace.com as another of the “stocks which could double.” Stay tuned this week as we feature THQI with a full outlook for its long-awaited turnaround.
VocalTec Communications Ltd. (NASDAQ: CALL) is one that we want to revisit. This was a cast member on Aug.21 of the Unusual Suspects and we noted after a $38 close: “We can’t call for a short sale but those who are sitting on big gains should at least consider taking the cost basis out of the trade here so that you can still have upside and you leave assured returns in the name.” Our call was helped by the notion of Google’s Gmail Call feature and then on talk that Cisco may try to acquire Skype. While shares closed up 3% on Friday, the price is all the way back down to $26.75 and that broke a 10-straight-day drop and volume has petered out. Calling a bottom or calling a buy on a small-cap after we already gave a set-up after the merger for a 150% gain is tough to do, but those who want in now have another shot. This is far from riskless, but VocalTec is now the owner of the magicJack cheap internet telephony player.
Vonage Holdings Corporation (NYSE: VG) was sort of in the same boat as VocalTec as far as its risks to the business over Gmail’s call application and if Skype were to be acquired by Cisco. While Vonage shares closed down 1.75% at $2.24 on Friday, it still closed up 10.3% from the Friday before and Friday was the only down-day it saw this week. If this new competition was such a large ongoing threat, Vonage would have followed VocalTec lower.
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JON C. OGG