Our Profit Catalyst Trifecta
We launch our Profit Catalyst Alert service with three stocks that have recently hit all our marks: SolarEdge (NSDQ: SEDG), Photronics (NSDQ: PLAB) and Vera Bradley (NSDQ: VRA).
As you’ll see, these companies have had fundamental shifts in their businesses that have been recognized—but not fully appreciated—by the market.
In this, our first weekly edition of Profit Catalyst Bulletin, we’ll give you the basics on these companies, which are ripe to buy right now. On Tuesday, January 19 we’ll follow up with full reports in our first full monthly issue. In that issue we’ll also discuss our strategy to an even greater depth, and have updates on company performance.
First up may be a surprise to those who follow the renewable energy industry and know that it recently took another one of its periodic beatings. Benchmark Guggenheim Global Solar ETF was down 11% in 2015 and has cooled a numbing 40% since its 52-week high in June.
The carnage has been broad, with solar system operators and equipment suppliers alike hit hard. But solar installations continue growing rapidly worldwide; many solar operators still expect growth of 40% to 60% for the next few years and are positioned to make a lot of money in the sector.
SolarEdge is one of them.
SolarEdge makes inverters and optimizers for solar panels. These high-tech boxes are the brains behind solar panels, allowing them to convert and maximize energy collected from sunlight. Consider:
- SolarEdge revenue skyrocketed 144% in fiscal 2015 and was up 72% in the first quarter of this year.
- Profits are expected to grow 80% in 2016 and another 30% in 2017.
- The stock, which is down 54% since its mid-year high, trades at a puny price-to-earnings ratio of 14 times based on 2017 estimates, despite this impressive growth.
Buying stocks simply because they are bumping along 52-week lows can be a dangerous business. Stocks need a catalyst to move higher, and our Launchpad system first uses trading volume to uncover such catalysts. On Nov. 5, SolarEdge traded 3.8 million shares, almost five times its average volume.
That caught our attention, and then we discovered that SolarEdge is making the kind of changes we expect from a Launchpad stock. Around the time of that volume spike, management revealed that its new HD Wave technology would lower the cost of manufacturing dramatically.
This technology both addresses the new, lower-cost mandate driving the solar business and eases investor worries about a competitor that was undercutting SolarEdge’s prices.
Also on Nov. 5, SolarEdge stock closed up 28%, but the market still hasn’t recognized the company’s full potential. Considering its stellar earnings power, there’s plenty of room to run.
Buy SolarEdge up to $32.
SolarEdge is kind of like an arms dealer that sells to all sides and profits no matter which army wins. In the same way Photronics doesn’t take sides in wars waged among chip makers—it supplies many of the best.
Photronics is also on the cutting edge of this fast-moving business:
The smaller computer chips get, the bigger Photronics sales become. And chips continue to shrink to mind-bendingly tiny sizes.
Over the past two years Photronics has been developing tools used to make these increasingly smaller, more powerful chips. Its most recent quarter showed the bounty reaped from this strategy. Revenue from its “photomasks” grew 28%, much faster than overall revenue. These highly profitable masks helped fatten margins and caused net income to quadruple.
Although Photronics had these cutting-edge masks a year ago, big customer orders have just started spilling in. We noticed this when the stock’s trading volume spiked in early December. The stock traded more than five times its average volume and jumped 5%.
This is exactly the type of volume spike that the Launchpad method screens for. It alerted us that a new development could be at work at Photronics. (This was the second quarter in a row that Photronics saw a surge in volume on positive numbers.)
Earnings have more than doubled in the last two quarters, a trend that should continue for the current quarter. Although growth is expected to slow to 28% in fiscal 2016 and 19% in fiscal 2017, the stock trades at a temptingly low valuation—just 13 times 2017 estimates.
Earnings per share are expected to jump 28% this year and another 19% in 2017 to $0.98. Revenue growth is driving some of the earnings improvement, but management’s tenacious hold on operating expenses has magnified the improvement.
And the company has a strong balance sheet. Aided by its net cash balance of $74 million, Photronics has been paying down its $67 million of long-term debt with free cash flow.
Buy Photronics up to $15.
Our final pick isn’t another cutting-edge tech company, but a cutting-edge fashion company. Vera Bradley sells floral-patterned cotton handbags has been luring customers back to its stores with new, sophisticated styles. These sleek monochrome microfiber and leather bags are impressing consumers so much that an unstylish decline in revenue has been reversed and profitability is rebounding.
Although some of the new styles were introduced as far back as August 2014, it has been a long, bumpy road for investors who bought the stock then, hoping for a turnaround. The stock, which traded at $30 in spring 2014, has hit turbulence almost every quarter since, as hopes proved premature. The Launchpad method, which is based on buying a stock only after a volume spike confirms a fundamental change, would have saved investors the misery of watching their investment drop to below $10 last September.
Vera Bradley has beaten sales and profit estimates for the last two quarters, mainly because of the higher sales of these new bags. The stock jumped 50% since a 28% leap in earnings was reported in December but should continue to race higher as estimates catch up to this striking growth. Fourth-quarter results, which will be reported in early March, will reflect the uber-important holiday season. Current estimates expect only 15% growth in fiscal 2017 (ends January 2017), a conservative rate considering the much higher growth showcased last quarter. If annual growth for the next fiscal year keeps that pace, the stock could rocket to the mid $20s.
Buy Vera Bradley up to $18.