I follow quite a lot of companies, so the usefulness of a watchlist to me cannot be overstated. Without my watchlist, I'd be unable to keep up on my favorite sectors and see what's really moving the market. Even worse, I'd be lost when the time came to choose which stock I'm buying or shorting next.
Today is Watchlist Wednesday, so I'm discussing three companies that have crossed my radar in the past week -- and at what point I may consider taking action on these calls with my own money. Keep in mind that these aren't concrete buy or sell recommendations, nor do I guarantee I'll take action on the companies being discussed. What I can promise is that you can follow my real-life transactions through my profile, and that I, like everyone else here at The Motley Fool, will continue to hold the integrity of our disclosure policy in the highest regard.
American Eagle Outfitters (NYSE: AEO )
With the stock market still very much near its all-time highs, there are what I deem very few value stocks out there. One company, though, that is quickly rising the ranks on my potential buy list is teen retailer American Eagle Outfitters.
There's no need to sugarcoat American Eagle's second-quarter report -- it was bad! The company delivered a 7% decline in same-store sales (and that was including a nice jump in direct-to-consumer sales) while also forecasting third-quarter EPS of $0.14-$0.16 as compared to previous forecasts of $0.35. Ouch! This is disappointing news for American Eagle's upcoming back-to-school season, but it's also not out of the ordinary. Teen retailer Abercrombie & Fitch (NYSE: ANF ) also reported an 11% decline in same-store sales in the U.S. and issued downbeat guidance on weak sales to female customers. This certainly doesn't help Abercrombie's case with the company fresh off another instance of CEO Mike Jeffries sticking his foot in his mouth.
But I've seen this number from American Eagle many times before and I have an incredible amount of faith in its management team. American Eagle is set up perfectly in between lower-end margin-hampering price points such as those found at Aeropostale and wallet-crushing higher-end prices found at Abercrombie -- yet its product line-up offers the same branding you can find at either company. To add, American Eagle has $405 million cash ($2.10 a share) with no debt and pays out an impressive 3.4% yield. If shares were to dip another 10% to 20% from current levels, I will almost certainly be backing my bullishness with my own money.
Toll Brothers (NYSE: TOL )
It's pretty hard to argue against any stock in the housing sector, given that low inventory levels and historically low lending rates have created the best pricing power homebuilders have seen in a half-decade. But, not all is as it seems in this sector.
Although homebuilders have enjoyed an impressive run, mixed U.S. home data and the very imminent prospect of rising mortgage rates would bode very poorly for luxury homebuilder Toll Brothers.
Homebuilder confidence may be at an eight-year high, but new homes sales tumbled 13.4% last month to a nine-month low as mortgage rates have risen by more than 100 basis points in just the past three months. Even scarier, mortgage origination activity is down more than 50% from its May peak. What this signals to me is that the American homebuyer has been spoiled by low interest rates over the past couple of years and a steady trend of higher mortgage rates when the Fed begins to pare back its monetary easing program known as QE3 is only going to make matters worse for homebuilders.
This is especially bad for Toll Brothers because it caters to upper income earners who are certainly going to be more sensitive to hikes in mortgage lending rates. With Toll already valued at what seems to be a steep 20 times forward earnings, I see considerably more risk and less reward here based on the current economic data and would suggest looking at Toll Brothers as a possible short-sale candidate.
Trina Solar (NYSE: TSL )
Another industry that's been on fire throughout much of 2013 has been the solar industry which has seen a resurgence in orders and a drop in polysilicon prices which have helped to boost margins. Still, even with these improvements it's a tale of two countries.
In the United States, First Solar (NASDAQ: FSLR ) is dealing with lower costs, better panel efficiency, and $1 billion in net cash on its balance sheet. It's benefiting from big contract orders in the U.S. from utilities and big businesses and is finally being protected by tariffs from cheap Chinese solar producers.
On the other hand, we have Chinese solar manufacturers like Trina Solar, which are seeing sales buoyed by China's pledge to introduce 35 GW of solar production by 2015. Trina Solar was able, in its most recent quarter, to boost its full-year production guidance to 2.3 GW to 2.4 GW which is about 15% higher than its previous estimates at the midpoint. Despite getting a lot closer to breakeven, it still needs to improve margins by more than five percentage points according to Foolish solar guru Travis Hoium, which is no easy task with increasing global competition, ongoing high panel supply, and nearly $1.2 billion in debt on its balance sheet .
In other words, I can understand the optimism surrounding these less-bad results, but in reality we're still looking at a company that hasn't even hit breakeven status yet that's rallied more than 350% off its 52-week lows. That seems incredibly steep and almost utopian for a company that's yet to prove it can compete with other global solar producers. If this rally continues higher, Trina Solar could make for an intriguing short-sale candidate.
Is my bullishness or bearishness misplaced? Share your thoughts in the comment section below, and consider following my cue by using these links to add these companies to your free, personalized watchlist to keep up on the latest news with each company:
- Add American Eagle Outfitters to My Watchlist.
- Add Toll Brothers to My Watchlist.
- Add Trina Solar to My Watchlist.
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