|Written by Rob Goldman
The annual year-end sale of big losers has commenced and will likely last for another week or so. This means that oversold opportunities lie in the hundreds of small cap stocks that have declined by 50% or more this year. Not only have we identified the big losing sectors but we have unearthed 2 stocks that are expected to enjoy substantial revenue and EPS growth next year, yet are down as much as 83% YTD and thus trade at ridiculously low valuations. See why these sub-$5 NYSE and NASDAQ-traded stocks could be some of the biggest winners in late December/early January.
THE NEXT BIG WINNERS
This is the time of year that sets apart the men from the boys. By the end of next week, the majority of year-end selling will have occurred. That means that the big losers of 2014 will reach or near their 52 week lows. With the exception of those stocks whose companies are likely closing their doors, thus taking the value effectively to zero, a year-end bounce in these names is right around the corner.
Nowhere is it more likely to occur (as it does every year) but in the small cap and microcap segment. With a YTD return of under 2% for the Russell 2000 Index as compared with the nearly 15% rise in the NASDAQ Composite, small stocks have lagged for much of the year. This year's losers stand a strong chance of becoming next year's winners, especially when taking into account the fact that inherent upside is likely greater with small stocks.
With this in mind, where does one go from here? A quick performance review illustrates that there are about 300 sub-$2 billion market cap stocks trading on NASDAQ or the NYSE that are down more than 50% for the year and currently trade below $10 per share. It is a great list in which to draw candidates, although I caution that there are some trends that could make it a bit difficult. The larger the market cap, the more likely that the stock is oil and gas heavy, for obvious reasons, and has analyst coverage. In the sub-$50M arena, there is a meaningful percentage of biotech stocks.
Both sectors contain risk for different reasons but could portend that they will also be strong industry performers next year. Since volume is higher and coverage exists, we have elected to profile 3 stocks in the slightly larger market cap segment of the small cap arena.
Two Oversold Stocks
It has been widely opined that oil and gas could see another 50% decline. It is certainly possible and would have a negative impact on stocks in the segment. Still, if ever there was a near term oversold group it might be this one. We caution that it might be too early to step in but you would be remiss if you didn't at least closely follow this gem.
Gastar Exploration Inc. (NASDAQ—GST—$2.85) is an independent energy company engaged in the exploration, development and production of oil, condensate, natural gas and natural gas liquids in the United States. Gastar's principal business activities include the identification, acquisition, and subsequent exploration and development of oil and natural gas properties with an emphasis on unconventional reserves, such as shale resource plays and the company has had significant success of late. In Oklahoma, Gastar is developing the primarily oil-bearing reservoirs of the Hunton Limestone horizontal play and expects to test other prospective formations on the same acreage, including the Woodford Shale and the Meramec Shale (middle Mississippi Lime), which Gastar refers to as the Mid-Continent Stack Play. In West Virginia, Gastar is developing liquids-rich natural gas in the Marcellus Shale and has drilled its first successful dry gas Utica Shale/Point Pleasant well on its acreage.
The company is hitting on all cylinders, as evidenced by its recent releases and although 2015 financial guidance may have to be reduced to some degree, it appears to already be reflected in the stock price. For example, at current levels, the stock trades 69% below its 52-week high achieved in June. Yet, Wall Street expects revenue to rise by 33% next year and EPS to essentially double from $0.22 to $0.43. Moreover, the stock trades at a ridiculous 6.6x P/E on FY15E EPS. The current price is just a hair above the 52 week low and even though oil and gas stocks are woefully out of favor, this stock could be a big winner in late December/early January.
InterCloud Systems, Inc. (NASDAQ—$3.23) has some similarities with GST above. The stock trades 83% below its year-high and 10% above its 52 week low. As with GST, the Street estimates that revenue will jump by 33% next year and they have been awarded a series of new contracts of late, demonstrating strong top-line growth. Granted, EPS is on the decline to its aggressive growth stance, but even if Street EPS estimates of $0.41 are too high, we do not believe it would materially drop from the $0.41 projection. At current levels, this cloud and enterprise network virtualization provider trades under 8x FY15E EPS.
Interestingly, the stock trades at a big discount to other industry peers that have been smacked. e2open, Inc. (NASDAQ—EOPN) trades over 2x next year's revenue forecast while ICLD, which is forecast to grow revenue at a higher pace (albeit to a different market and audience) trades at a paltry .5x net year's revenue estimate. In our view, this is an example of why ICLD offers greater upside.
Launched in May 2010, The Goldman Guide is a free weekly publication of Goldman Small Cap Research and is written by Founder Rob Goldman with contributions from the GSCR contributor team. This non-sponsored investment newsletter seeks to provide investors with market, economic, political and equity-specific insights via an action-oriented, straight to the point approach. No companies mentioned in this newsletter are current sponsored research clients of the Company or its parent, unless noted, With rare exceptions, all companies or investment ideas mentioned in this publication are publicly traded stocks listed either on the NYSE or the NASDAQ. Goldman Small Cap Research members and contributors' bios, certifications, and experience can be found on our website: www.goldmanresearch.com.
This newsletter was prepared for informational purposes only. Goldman Small Cap Research, (a division of Two Triangle Consulting Group, LLC) produces non-sponsored and sponsored (paid) investment research. Goldman Small Cap Research is not affiliated in any way with Goldman Sachs & Co.
The Firm's non-sponsored research publications category, Select Research, reflects the Firm's internally generated stock ideas, along with economic, industry and market outlooks. In virtually all cases, stocks mentioned in Select Research offerings are listed on the NYSE or the NASDAQ. Publications in this category include the weekly newsletter The Goldman Guide, daily Market Monitor blogs, Special Reports, and premium products such as The 30-30 Report. Goldman Small Cap Research analysts are neither long nor short stocks mentioned in this newsletter.
Opportunity Research reports, updates and Microcap Hot Topics articles reflect sponsored (paid) research but can also include non-sponsored micro cap research ideas that typically carry greater risks than those stocks covered in Select Research category. It is important to note that while we may track performance separately, we utilize many of the same coverage criteria in determining coverage of all stocks in both research formats. Please view the company's individual disclosures for each engagement, which can be found in company-specific Opportunity Research reports, updates and articles.
Goldman Small Cap Research has not been compensated for any content in this issue.
All information contained in this newsletter and in our reports were provided by the companies mentioned via news releases, filings, and their websites or generated from our own due diligence. Economic, market data and charts are provided by a variety of sources and are cited upon publication. Stock performance data is derived from Yahoo! Finance. Our analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests, retain editorial control, and ensure independence.
The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Goldman Small Cap Research did not make an independent investigation or inquiry as to the accuracy of any information provided by the Company, other firms, or other financial news outlets. Goldman Small Cap Research relied solely upon information provided by companies through filings, press releases, presentations, and through its own internal due diligence for accuracy and completeness. Such information and the opinions expressed are subject to change without notice. A Goldman Small Cap Research report, update, article, blog, note, or newsletter is not intended as an offering, recommendation, or a solicitation of an offer to buy or sell the securities mentioned or discussed. This newsletter does not take into account the investment objectives, financial situation, or particular needs of any particular person. This newsletter does not provide all information material to an investor's decision about whether or not to make any investment. Any discussion of risks in this presentation is not a disclosure of all risks or a complete discussion of the risks mentioned. Neither Goldman Small Cap Research, nor its parent, is registered as a securities broker-dealer or an investment adviser with the FINRA or with any state securities regulatory authority.
ALL INFORMATION IN THIS REPORT OR NEWSLETTER IS PROVIDED "AS IS" WITHOUT WARRANTIES, EXPRESSED OR IMPLIED, OR REPRESENTATIONS OF ANY KIND. TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLE LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE FOR THE QUALITY, ACCURACY, COMPLETENESS, RELIABILITY OR TIMELINESS OF THIS INFORMATION, OR FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES THAT MAY ARISE OUT OF THE USE OF THIS INFORMATION BY YOU OR ANYONE ELSE (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF OPPORTUNITIES, TRADING LOSSES, AND DAMAGES THAT MAY RESULT FROM ANY INACCURACY OR INCOMPLETENESS OF THIS INFORMATION). TO THE FULLEST EXTENT PERMITTED BY LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE TO YOU OR ANYONE ELSE UNDER ANY TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY, PRODUCTS LIABILITY, OR OTHER THEORY WITH RESPECT TO THIS PRESENTATION OF INFORMATION.
For more information, visit our Disclaimer: www.goldmanresearch.com.