An Expensive Stock With Future Upside Priced Into its Valuation
The most watched post-earning stock performance on Tuesday was from SolarCity Corp (NASDAQ:SCTY), as investors expected strong performance following Tesla Motors Inc (NASDAQ:TSLA)’s record quarter.
In the last month SolarCity Corp (NASDAQ:SCTY) stock had increased 85%, but then ticked lower 12.4% on Tuesday after a missed quarter. On many fronts, the company showed strength, but on others, there was weakness. For example, investors might not like their short-term guidance and the margin weakness, but should be encouraged with its deployment guidance over the next year.
While SolarCity Corp (NASDAQ:SCTY)’s quarter had both positive and negatives, most believe that the real upside for this stock is for the long-term, not necessary right now. The company works closely with Tesla Motors Inc (NASDAQ:TSLA) and is involved in the installation and sale of solar energy systems. This is potentially a lucrative business, yet when you consider the unknowns of the business, SolarCity Corp (NASDAQ:SCTY) is a company that is quite expensive.
Currently, the stock is trading at more than 18 times sales and has operating margins of (53.5%). Thus with most upside being long-term, the stock being very expensive, and nowhere near profitability, I suggest sitting this one out and maybe exploring its valuation and its upside in the next 24 months.
A Lack of Clear Value Makes this High-Flyer a Sell
InterOil Corporation (USA) (NYSE:IOC) is a $4.2 billion company that has seen its valuation increase 55% in 2013, including 9.57% on Tuesday after reporting earnings. For the quarter, InterOil Corporation (USA) (NYSE:IOC) beat on the top line and met bottom line expectations, but the upside was created due to comments regarding the much anticipated partnership selection for its Papua New Guinea liquefied natural gas project.
When you look at InterOil Corporation (USA) (NYSE:IOC)’s quarter, it was mostly boring with nothing spectacular to note. However, the company has been in the process of seeking a partner, which many investors believe will improve cash flow and lead to a resource selldown. Thus the company’s comments of “several bids” and being in the “final stages” created optimism.
My problem is that I don’t think the stock is either cheap nor do I believe the company is efficient. It currently trades at 3.10 times sales (which is fair value) but has an operating margin of just 1.13%. Neither number is attractive, and after large YTD gains, I fear that all upside may be priced into the stock. Hence I don’t necessarily think InterOil Corporation (USA) (NYSE:IOC) is a bad investment, I just don’t see clear value.
An Undervalued Transportation Stock to Buy
While the transportation sector trades at all-time highs, Copa Holdings, S.A. (NYSE:CPA) is a great under-the-radar growing investment in the space. On Tuesday it rose 7.88% after reporting very strong earnings that beat on both the top and bottom line by a wide margin. The company saw both an 18% rise in total revenue and a boost in margins. The Panama-based company continues to expand its horizons and venture out on further flights, including a 6.3% rise in length during the last quarter.
Over the last year, Copa Holdings, S.A. (NYSE:CPA) has increased 68%, yet considering its growth, the company is fairly cheap. The stock trades with a price/sales of 2.60 and at 19 times earnings. Both metrics are slightly greater than the S&P 500. However, Copa Holdings, S.A. (NYSE:CPA) is fundamentally outperforming the growth of the market by a large margin, thus making the stock attractive when considering growth relative to its valuation. In my opinion, Copa Holdings, S.A. (NYSE:CPA) is not expensive, and even after its large gains, I still say to “buy”.
Conclusion
In my book, Taking Charge With Value Investing(McGraw-Hill, 2013), I discuss the art of buying after earnings. For the most part, success is measured by your ability to do two things. First, determine a company’s valuation relative to the broader market compared to growth. Second, read the report and listen to the call first and then look at the stock performance. You can then make a logical investment decision not impacted by emotion. Thus take these two pieces of advice, and I think you will find that your returns will increase when buying after earnings.
The article Are These Stocks a Buy After Earnings? originally appeared on Fool.com and is written by Brian Nichols.
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