While we Fools always invest with the long term in mind, we still think it is worthwhile to pay attention to short-term events. After all, stocks can sometimes move erratically based on the news of the day, so we like to keep close tabs on certain companies to ensure that our thesis for owning their shares -- or buying them -- is still intact.
So what stocks should be watched like a hawk in the second quarter? We asked that question of a team of Fools, and they called out Ferrari N.V. (NYSE:RACE), Square (NYSE:SQ) and FactSet Research Systems (NYSE:FDS).
An auto stock like no other
John Rosevear (Ferrari N.V.): Automotive stocks are a tough sell to many investors. But Ferrari is an automaker like no other, and that makes its stock a very interesting proposition.
First, Ferrari is highly profitable. Its EBIT margin was 21.5% in the first quarter, a huge number that would be more normal for a luxury goods company than an automaker. Compare it with General Motors' (8.2%) -- or for that matter, with Coach's 15.2%. And with just one factory, it's not at risk of losing money on idled production lines in a downturn.
Second, Ferrari is shielded from disruption by the nature of its products. With big automakers, we worry that shared self-driving cars will upend their business models. But Ferraris are bought for pleasure, not for commuting. If anything, the eventual ubiquity of self-driving vehicles might make the idea of Ferrari ownership more enticing.
As an investment, it offers real potential. Ferrari has a path to what could be significant profit growth, despite the fact that it deliberately limits its annual production to preserve its (tremendous) pricing power. CEO Sergio Marchionne plans to gradually increase Ferrari's production to about 10,000 vehicles a year from its 2017 target of 8,400 while adding super-expensive limited-run models and options to push average transaction prices higher.
So why am I "watching" Ferrari instead of buying? Because right now, it's far from cheap: The stock more than doubled over the last year as Wall Street started to catch on to its story. Ferrari's shares are now trading at around 29 times its expected 2017 earnings. That's arguably fair valuation given Ferrari's luxury-good-purveyor margins, but it's not cheap. If and when the stock price dips, I'll think seriously about buying.
The network that makes small business go
Travis Hoium (Square): One of the most intriguing stocks on the market today is Square, the payment processing company. It has become a favorite credit card processor for small companies, but it has also been spending millions to expand into services like accounting, inventory management, and small-scale loans, which has had a negative impact on profitability. Still, as you can see below, its financial results are improving rapidly.
What I'm looking for in the second quarter is further progress on the bottom line. Management has given second-quarter guidance range of $25 million to $28 million in adjusted EBITDA and adjusted earnings of $0.03 to $0.05 per share. After beating estimates each of the last four quarters I think there's a chance the second quarter will top even Square's rosy expectations; if that's the case we could see continued gains from the stock.
Square's business model is centered around building out a platform, which is very costly up front, and then profiting as its network grows in both the number of customers and payments processed. The bigger the network, the more attractive it is to new businesses, and to the app partners that are bringing it new functionality. If Square continues its revenue growth and turns the corner to profitability, we'll know this business is full steam ahead.
Will Wall Street provide us with another buying opportunity?
Brian Feroldi (FactSet Research Systems): FactSet Research Systems' business model is about as rock-solid as it gets. The company provides thousands of mutual funds, insurers, banks, hedge funds, and more with mission-critical data so they can make more informed financial decisions. These customers pay a recurring subscription fee that includes annual price increases to access FactSet's customizable platform. Given that FactSet's customer retention rate exceeds 95%, it is clear that it provides a service that many financial institutions simply cannot live without.
Though FactSet operates a remarkably stable business, Wall Street has a habit of selling off the company's stock whenever it doesn't produce a perfect quarterly report. In October, FactSet's shares took a hit after adjusted earnings came in a penny a share below expectations. The price slumped again in March after the company's top-line growth failed to impress traders.
What the market overlooked in both of these reports was that the company's underlying business remains quite healthy. In fact, over the last year, FactSet has added new clients to its platform, passed along price increases, bought back stock, boosted its dividend, and made a few tuck-in acquisitions to make itself more competitive. In total, FactSet continues to support the long-term thesis for owning its stock, which is why a small miss here or there doesn't really bother me all that much.
For the second quarter, Wall Street expects FactSet to grow its top and bottom lines by 8.5% and 12.2%, respectively. While I think that these numbers are achievable, I'm certainly hoping that the market overreacts to FactSet's report yet again and provides investors with another buying opportunity. If that happens, you can bet that I'll be more than happy to add a few more shares to my portfolio.