Finally, some fundamental performance to go along with speculation….. But still not enough
Shares of technology company Research In Motion Ltd (NASDAQ:BBRY) moved higher by 8.15% on Wednesday after the company reported an order for one million BB10 phones from one of its “established partners.” This news added some validity to the presumed rumors of success on behalf of the BB10. And although this “established partner” remains a mystery, most believe it to be either AT&T or Verizon.
For the last three months I have remained highly critical of Research In Motion Ltd (NASDAQ:BBRY), as all of its six month 110% rally has been due to acquisition rumors and BB10 speculation. There was never any reason to believe BB10 would be a success, however one million orders is pretty impressive, even for a skeptic such as myself.
Spinoff provides lift, but stock may still be too expensive
The cloud-based company VMware, Inc. (NYSE:VMW) saw an 8.08% rise on Wednesday after a slew of announcements including a spinoff of it and EMC’s joint venture the “Pivotal Initiative.” This new “Pivotal” spinoff will be owned in part by VMware (39%) and will aim to assist clients working on big data projects or developing web/cloud apps. This news came as VMware gave a business presentation and issued guidance that was slightly below the consensus.
VMware is a company that has seen losses of about 15% over the last two months as the company’s valuation aligns to reflect its fundamental growth. The truth is that VMware, Inc. (NYSE:VMW) is no longer a 30-40% annually aggressive growth company, but rather 15-20%. My problem is that despite 15-20% growth guidance, the stock is still priced like a company with 30% growth, trading with a price/sales ratio of 7.0 and a P/E ratio of 47.00. Over the next year the company should see its bottom line double, however while this isn’t the most overvalued midcap stock in the market, it is not the cheapest either.
Why buy fair value when you can buy undervalued with better growth?
Transportation company J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT) hit a fresh 52-week high on Wednesday with gains of 6.19%. The reason for the rally is beyond me, as I have been unable to find any company related news to spark the rally. Therefore, it was most likely due to an industry wide boost, as Swift Transportation, UPS, and several airline stocks all touched new highs. With that being said, this is a stock with low double digit year-over-year growth, trading with a price/sales of just 1.22, and a P/E ratio of 28.74. Therefore, some might say it’s a little too expensive, but I say that it’s priced just right to grow with fundamental performance.
While I do think that JB Hunt is priced fairly, there are faster growing and cheaper stocks in its space. XPO Logistics Inc (NYSE:XPO) is a company that is trading at just 0.30 times next year’s revenue, has almost as much cash on its balance sheet as its market capitalization, and is seeing top line growth of 150% year-over-year.
The company has an incredible trend of growth occurring before our eyes, one that is very rare in this market. For example, in 2011 it had revenue of just $177 million, but last year had sales of $278 million, and is projecting revenue of $500 million this year, and more than $1 billion next year. So while other companies in the transportation space are touching new highs with growth between 2-15%, XPO is relatively unnoticed with 1,000% plus the growth. As a result, I wouldn’t follow the trend of the fairly valued JB Hunt, but rather seek out the explosive growth of XPO Logistics for long-term gains.
Conclusion
Wise and disciplined investors know how to remain calm and patient even in the most tempting of situations, and when a stock shoots drastically higher, it is sometimes difficult to refrain from chasing the trends. In my book, “Taking Charge With Value Investing (McGraw-Hill, 2013)” I thoroughly discuss the art of patience and market psychology, and explain that successful investors are able to first assess the news and compare it to fundamentals and valuation before even looking at the performance of the stock. Because after all, finding distinctions between performance, fundamentals, and valuation is what ultimately creates value and allows for the largest of gains.
The article Wednesday Movers: Are Any of these Stocks a Buy? originally appeared on Fool.com and is written by Brian Nichols.
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