Mining Pockets of Growth
Talk about starting the year off with a bang. We’ve never claimed to be able to predict the future, a point made obvious by our launch coincident with an ugly 6% sell off in the market. During these periods of irrational trading, whether it be meltdowns or melt-ups, we will continue to do what we do best, dig into the fundamentals of individual companies to find the best possible investments.
I expect that China will continue to slap the market around. Growth in that country has been supported primarily by government financing, and is unsustainable. This is why I am focusing on domestic companies with little foreign exposure, particularly those dependent on Asian growth.
Although U.S. growth (as measured by GDP) slowed to 2% in the third quarter of 2015 from almost 4% the prior quarter, economic expansion rarely follows a straight line. That deceleration in productivity was followed by robust employment numbers last week.
The best news for investors is that pockets of robust growth exist even in today’s economy. My job is to find those opportunities for you. Each day I’m scouring the market for stocks moving up on big volume due to significant fundamental change.
And even on Jan. 6, one of the weakest days in the market, I found more Launchpad candidates than in the prior two weeks. I’ll be sure to let you know as soon as I find one that passes the analytical rigor that I’m putting them through.
Now for some updates on the stocks that I’ve told you about so far. Remember these are names that I expect to show significant growth over the next six to twelve months. They are not immune to market gyrations but should be higher as fundamental news comes out.
When I started working on Solaredge, the biggest risk to the stock was the expiration of the investment tax credit (ITC) for renewable energy projects scheduled for year-end 2016. The sunset on this benefit was expected to create some big waves in demand, a tsunami in 2016 followed by a drought. However in mid-December Congress voted to extend this tax credit to 2023 with a controlled, steady cut in the subsidy. This is great news for the solar industry- it levels off demand and provides residential and commercial customers a longer timeline to migrate to solar.
A less positive, but expected, development was Nevada’s decision in late December to slash the rates paid to consumers for excess energy produced by their solar panels that is sent to the energy grid for resale. This agreement between consumers and utility companies is called a net-metering. The solar industry is considering suing the state but in the meantime several solar players have halted installations until the issue can be resolved.
Luckily, Solaredge’s focus on lowering the cost of installation has been targeted at helping its customers succeed even if prices fall. On the plus side, most other states offer net-metering rates that support solar expansion and have recently affirmed these rates. Solaredge’s continued growth is not predicated on continued expansion in Nevada.
Although the official date has not been released yet, we should see second quarter earnings from Solaredge in the first week of February.
Photronics (PLAB) will be presenting at a broker conference on Jan.14. We’ll be scouring the transcript and presentation material for any hints about the pace of business and will publish any updates immediately. Photronic’s first quarter ends this month and will be reported mid-February.
Photronics should continue to benefit from demand for smaller yet more powerful chips. Look no further than January’s Consumer Electronics Show for examples of gadgets requiring more intelligence on a tiny surface. Virtual reality glasses for gaming, “smart” ski goggles that keep you on trail during a white-out or wearables that everything from heart rate to perspiration will all require small yet smart chips. Photronics’ tools help chip manufacturers produce these chips.
Vera Bradley (VRA) won’t be reporting its fourth quarter until early March. For most public companies there is a longer delay in reporting for the final quarter of earnings as they work with auditors to finalize year end details.
Until then we’ve been monitoring Vera’s annual sale inventory to gage demand for newer styles. We’ve yet to see any of the new styles marked down, an indication that demand remains strong. Informal surveys that we’ve conducted show surprise and enthusiasm for Vera’s new designs. Many consumers were not aware that Vera had introduced such sleek styles. As the company ramps up its marketing and advertising this year, we expect heightened demand.