As we do each month, we asked a handful of our top analysts across sectors for one stock that looks especially compelling right now. Here are the companies they singled out.
Jim Mueller: I like Netflix (NASDAQ:NFLX) this month. It's down about 25% from its high in early March, which, for me, means opportunity. Reasons for the decline include the company's decision to pay Comcast (NASDAQ:CMCSA) for faster streaming speeds on pipes controlled by that company, as well as stories that Apple (NASDAQ:AAPL) is -- finally! -- entering the streaming television market, in a deal with, you guessed it, Netflix's favorite ISP, Comcast.
The payment deal with Comcast -- and likely others -- seems to indicate that Netflix CEO Reed Hastings has abandoned his long-held belief that ISPs should deliver all data sent through their pipes equally, without regard to the data's origin. That means higher operating costs for the company. On the other hand, Apple and Comcast are still discussing what their possible deal will look like and what will be delivered, so it's not even clear yet what exactly this competing service will entail. But it seems that rumors that anyone is considering entering the "streaming" market are guaranteed to affect Netflix's shares for the worse, regardless of what is offered or when.
For investors who can look past all that to a company that is growing members at a 23% rate domestically and 78% internationally (as of the last reported quarter), is differentiating itself with originals like House of Cards, and will certainly become even more international in scope, the bad news above gives an entry point that is 25% better than just a few weeks ago.
Jim Gillies: Last week Barnes & Noble (NYSE:BKS) took a near-20% header when Liberty Media (NASDAQ:FWONA) announced it was selling a majority of its preferred stock stake in the bookseller to "qualified institutional buyers." Investment media pounced on this revelation as the latest death knell for B&N, painting it as Liberty retreating, tail tucked between its legs, from a bad investment.
I think the market reaction to Liberty's exit is wrong. B&N operates in three segments: Retail (i.e. the last national bookstore chain standing), College (retail stores on college campuses), and NOOK (eReaders that have arguably lost the digital reading war to Amazon's Kindle).
B&N has paired money-burning NOOK with cash-generating College to form NOOK Media. College's cash flows, combined with continuing cash payments from Microsoft for NOOK0 development, essentially "ring-fence" the potential value destruction.
Meanwhile, Retail is a cash cow, producing an estimated $235 million free cash flow over the past year. Assuming NOOK Media is worth a zero (at some point I'd actually expect NOOK to be shuttered or sold -- likely to Microsoft), the current share price implies that Retail's free cash flow will decline about 11% in perpetuity. That's too harsh.
Liberty's exit changes nothing about B&N's capitalization -- just the owners. Last year those prior owners were perceived as an impediment to B&N's CEO and largest shareholder buying the retail operations himself. Now they're gone, and their exiting press release itself suggested a sale is now more likely. I estimate a potential split-up and separate buyouts of the divisions would fetch 50% or more than the current share price.
Brendan Mathews: Over the past year, shares of CarMax (NYSE:KMX) have lagged the S&P 500, and the stock took a small dip on weaker-than-expected quarterly results. This market activity has presented investors with the opportunity to buy a well-run company with plenty of room for growth at less than 21 times trailing earnings.
CarMax is revolutionizing the used-car industry by making the process consumer-friendly -- no price haggling, limit guarantees, and a huge selection of late-model vehicles. Customers love it. In fact, 93% of CarMax customers surveyed say they'd recommend it to a friend. And I'm one of those customers. After recently receiving an appraisal from CarMax, I can personally confirm it really is "the way car buying should be."
And CarMax is rolling out its customer-friendly model more widely. Today, it has 131 superstores, including five that opened last quarter. It won't happen overnight, but I expect that CarMax will eventually double or triple its store count, leading to significantly higher sales and profits. For patient investors, this company presents an excellent opportunity.
Maxx Chatsko: I am amazed at how little attention next-generation industrial biotech company Solazyme (NASDAQ:TVIA) garners from investors, especially with growing concerns of an overheated market. The company has developed a novel technology platform that feeds sugars to heterotrophic algae (grown in the dark, not in the sun), which are genetically modified to produce specific oil compounds that can be sold as cosmetics, industrial lubricants, food ingredients (mostly non-GM), fuels, and more. This year Solazyme is positioned to validate its technology at commercial scale after more than one decade of scaling up, product development, and partner courting. That opens the door to numerous short-term and long-term catalysts.
First, Solazyme is fresh off a $202.8 million financing (debt notes and common stock) that fortified a balance sheet sporting $167 million in cash at the end of 2013. That will give the company approximately $300 million in its coffers at the end of the second quarter, or about 36% of its current market cap, to throw behind expansion projects. That's pretty impressive, in my opinion.
Second, Solazyme is expected to flip the switch of downstream processing equipment at its 100,000-metric-ton-per-year facility in Moema, Brazil, any day now, which will effectively mark the beginning of start-up activities. Together with a 20,000-MT facility started earlier this year in the United States, Moema will give the company 120,000 MT of annual oil capacity once ramp-up activities are completed in 12-18 months. That marks an impressive leap from just 1,820 MT in annual capacity from a demonstration facility in Peoria, Ill.. and represents over $240 million in annual revenue potential.
Solazyme needs to prove it can bring production costs down and reliably produce commercial quantities of oils (not to be confused with fuels) for its partners. But even in the face of minor to moderate short-term setbacks, I think investors looking for safe and steady growth will have a difficult time losing in the long term at a valuation south of $1 billion.
Jason Hall: Clean Energy Fuels (NASDAQ:CLNE) is one of the most misunderstood companies out there. Mr. Market has punished the stock, as truckers have been slow to adopt natural gas due to a lack of engine availability. Toss in two analyst downgrades, one short attack, and a handful of inaccurate articles written by anonymous sources, and the stock is down 65% since March 2012.
Despite the slower-than-expected adoption of natural gas by truckers, the company has grown revenue more than 20% since 2011, and is in the driver's seat with more than 500 CNG and LNG refueling stations. While it's easy to think that this is a tiny number -- after all, there are more than 100,000 gas stations in the U.S. -- the market Clean Energy is targeting is different.
There are only around 6,000 diesel depots that refuel the big trucks, and these are almost 100% owned and operated by independent companies, and not "big oil." Better yet? Clean Energy is partnered with the largest, Pilot/Flying J, which is about twice the size of numbers two and three, TravelCenters of America and Love's.
Here's the best part: The Cummins Westport ISX12 G heavy duty natural gas engine will ship around 10,000 units in 2014. With an average consumption of almost 20,000 gallons annually, that's 200 million gallons of new demand. Clean Energy's total fuel deliveries in 2013? 214 million gallons. That's a massive growth opportunity on the horizon.
Tim Beyers: If you've yet to open a position in Walt Disney (NYSE:DIS), now's the time. Why? One catalyst (i.e., Marvel) is proving itself nigh invulnerable at cinemas even as another (i.e., Lucasfilm) remains in the formative stages as a Disney property. All signs point to fiscal 2016 as the biggest year in the company's history.
How can we be so sure? December 2015 brings the return of the Star Wars franchise with Star Wars: Episode VII while May 2016 marks the return of Captain America 3, which looks to be not only a follow-up to Avengers: Age of Ultron but also a tight sequel to Marvel's latest megahit, Captain America: The Winter Soldier. All told, Marvel Studios boss Kevin Feige says there's a production plan to keep theatergoers engaged till at least 2028.
Meanwhile, Disney's business is buttressed by its cable networks, which produce 60% of operating income. Theme parks and a high-margin consumer products business also contribute mightily to cash flow from operations, which reached a staggering $9.5 billion last year. That's up from $4.3 billion for the fiscal year ending in October 2005, three months prior to CEO Bob Iger's $7.4 billion bid for Pixar.
Today, Pixar, Marvel, and Lucasfilm properties are intertwined with every area of the business. "It's not ... about box office," Iger said in a Bloomberg Businessweek interview about Disney's handling of Marvel. "It's about the entire entity doing well, which ultimately lifts the Disney stock." History says Iger will continue to make good on that maxim.
Patrick Morris: Citigroup (NYSE:C) has had a miserable go of things in 2014, but that may create opportunity for investors willing to take the dive in. First, it announced it would be revising its 2013 income down by $360 million thanks to fraudulent operations from its unit in Mexico. Then came the news that the Federal Reserve had flatly rejected the bank's plans to raise its dividend and buy back more than $6 billion worth of shares. All of this has led to its price falling by more than 10% on the year.
Yet digging beneath the surface reveals there's still a lot to like about the bank. It has a diverse stream of revenue across businesses and countries, and it delivers solid returns on both its equity and its assets. All of this has led the bank to grow its tangible book value by nearly 7.5% each year since 2009.
However, thanks to the troubles plaguing it of late, the bank now trades at a remarkable discount in relation to its peers. At current prices, the market thinks Citigroup is worth less than what the bank says people would receive if it were entirely liquidated -- its price-to-tangible book of 0.9 dramatically trails similarly troubled Bank of America at 1.3.
Buying a stock simply because it is trading at a discount can be risky, but at this price, Citigroup is tough to pass up.
Matt Frankel: Like Patrick, I think Citigroup is a great idea for April. It's unbelievably cheap and keeps getting cheaper. The bank's capital plan was rejected by the Federal Reserve a couple of weeks ago due to uncertainty surrounding the ability of some parts of the bank to remain adequately capitalized in the event of another major downturn. However, Citigroup's capital far exceeds the required minimum, and the bank has done very well in winding down its old, bad assets and focusing on the core areas of the business.
As the Citi Holdings unit's assets continue to be sold off, the bank will be more and more able to weather any economic storm, and dividends and buybacks will come back into the picture. It's a matter of when, not if, the bank is allowed to return capital to shareholders. The company can submit a revised capital plan, and I think it will expedite the process as much as possible.
Since the announcement of the Fed's rejection shares are down by more than 7%, and are now trading for just 84% of their tangible book value. In other words, you can buy Citigroup for less than the value of its tangible assets, and any future growth is just a bonus!
Andres Cardenal: Priceline.com (NASDAQ:BKNG) has positioned itself as the growth leader among online travel agencies, and this means self-sustaining competitive advantages for the company. Hotels and other travel service providers choose the platforms which offer access to more customers, while customers prefer to go where they can find more options and better deals. The service becomes more valuable as it grows in size, and this attracts a growing user base over time.
The platform includes more than 425,000 hotels and other accommodations in 195 countries as of the end of 2013, an increase of 54% over the previous year. Priceline is also expanding rapidly in the key mobile segment; the company exceeded $8 billion in gross mobile bookings during 2013 versus $1 billion in 2011 and $3 billion in 2012.
The business is clearly firing on all cylinders, with sales growing by an explosive 29.4% in the last quarter of 2013 and adjusted earnings per share increasing at an even stronger 30.7% during the period. In addition, Priceline trades at a forward P/E ratio of 18 times earnings estimates for 2015, quite a moderate valuation for such a strong performer.
Justin Loiseau: When AGL Resources (NYSE:GAS) acquired Chicago-area natural gas utility Nicor in 2010, many investors turned their back on the company. Not only did it cost AGL $2.4 billion, but it also reeked of "diworsification." The deal bizarrely included a Caribbean transport carrier, Tropical Shipping, which accounted for a surprisingly (and scarily) substantial 24% of Nicor's revenue at the time.
Now, AGL Resources is asking investors for another chance. The company announced this month that it's selling its subsidiary Tropical Shipping for $220 million. That means AGL can focus on its bread and butter: regulated natural gas and related assets. While the utility will maintain its income-accretive investment in Triton Container, it can now align its expertise on natural gas distribution, retail operations, wholesale services, and midstream operations.
AGL stock is currently priced just below its 52-week high, but long-term investors can appreciate its steady 4% dividend yield now more than ever, along with its consistently growing government-regulated profit. With no more awkward acquisitions on the horizon, AGL may just be the answer to investors' April addition.
Tamara Walsh: Shares of Coach (NYSE:TPR) have been kicked around recently after a series of earnings misses in which the luxury retailer reported slowing sales in its North American business. Fierce competition from rival retail brand Michael Kors has also chased away many investors. The stock is down more than 11% year-to-date. However, with shares of Coach now trading around $49 a pop, well below the stock's 52-week high, I believe there's an opportunity for patient investors to profit from Coach's turnaround.
With new management at the top, Coach is in the midst of rebranding itself as a lifestyle brand. The company's new creative director, Stuart Vevers, is in the process of adding fresh product lines such as shoes and apparel, which should help Coach better compete with Kors going forward. Also, Coach's men's business is also gaining momentum. In fact, men's sales increased 50% in 2013 and are on track to hit $1 billion by 2017.
International expansion creates another growth opportunity for the company in the year ahead. China looks especially promising, particularly as Coach was able to grow its Chinese sales by as much as 25% in the second quarter of fiscal 2014. Looking ahead, Coach should be able to generate about $530 million in sales in China this year. Moreover, the company is also growing its presence in other key markets like Europe and Japan. Together, these things should act as catalysts for the stock in the quarters to come -- particularly given the low expectations in this name today.
The Motley Fool recommends Amazon.com, Apple, Bank of America, CarMax, Clean Energy Fuels, Coach, Cummins, Michael Kors Holdings, Netflix, Priceline Group, Walt Disney, and Westport Innovations. The Motley Fool owns shares of Amazon.com, Apple, Bank of America, Barnes & Noble, CarMax, Citigroup, Coach, Cummins, Liberty Media, Michael Kors Holdings, Microsoft, Netflix, Priceline Group, Solazyme, Walt Disney, and Westport Innovations.
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