The market can sometimes be kind enough to discount some quality stocks for irrational reasons. When this occurs, you must first be conscious as to whether you are being tricked into a value trap. Much of this assessment will depend on the long-term viability of the company, often best encapsulated in the question, “What problem does it solve?” If it doesn’t solve a problem, chances are it is not a long-term investment but more likely a fad (although those can still run for years).
And if management is fine, did the company just miss a single quarter’s revenue target? I take single quarter misses in stride. Quarterly misses that are strung together are the real problem.
Here are some stocks that have been hit over the last quarter. Let’s go value hunting.
Zulily (ZU) is a company I hadn’t heard of, but it has an intriguing business model. ZU basically operates flash sales of products aimed at moms, selling clothes and accessories for them and their kids. I’m not crazy about retail, but ZU stock is growing sales and earnings at a nice clip. I think Zulily is early in its life cycle, and that’s the only time to own retail. ZU stock is more than 50% off its high, but has $300 million in cash and no debt. I think it’s worth checking out.
HomeAway (AWAY) is an online marketplace in which people can rent out their homes as vacation spots. It’s kind of like Airbnb. HomeAway is a cash flow machine, and has $440 million in net cash. AWAY stock is some 40% off its high and pegged at 22% long term growth. It’s a global venture and expanding rapidly. While there’s nothing proprietary about this business model, it is establishing a beachhead as a brand name in the space. Unless and until Priceline (PCLN) or other online travel websites begin offering the same service, AWAY stock has a chance to take over the space.
Whole Foods (WFM)
I told you to sell Whole Foods Market (WFM) last year. Now I think the selloff has put the leader in organic grocery stores close to fair value. It is still a bit pricey here, but I myself opened a small position last week in the high-30s. The company is a winner in the long term, despite all the talk about competition from other chains. While competitors like Sprouts Farmers Market (SFM) is real, Whole Foods has a huge head start and much more robust balance sheet. There is no competition from regular grocery stores and other stores selling organics, because shoppers there are not stealing market share from Whole Foods. The customer is distinct from the WFM shopper.
I’m becoming more bullish on the business model for LinkedIn (LNKD). I’m repeatedly hearing that you aren’t taken seriously as a businessperson unless you have a profile, and subscriptions are picking up. I still think LNKD stock is vastly overvalued as an investment. However, as a momentum trade, LNKD stock is 40% off its high. For the speculative, nimble trader, there may be a play here.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.