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These 3 Comeback Stocks Could Rise 50%

January 18, 2011 | About:

Street Authority

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Every company looks at a new year as a fresh opportunity. Companies make plans to boost sales, watch costs and deliver investor-pleasing bottom-line results. The three companies we're discussing today clearly didn't meet those goals in 2010. But the stars are aligning for better results this year, perhaps spectacularly so.

Let's see which of these three stocks has the highest upside in the year ahead.

1. MEMC Electronics Materials Inc. (WFR)

Forget about 2010, the past three years have been brutal for this maker of wafers used in the production of semiconductors and solar panels. Shares peaked at about $80 in early 2008 but have fallen into a trading range with lower highs and lower lows. This year, for a whole host of reasons, shares could easily snap back to life -- if the company can improve on more recent promising operating trends.

MEMC was once a solid semiconductor play until management started to focus on the nascent-yet-promising solar power industry, which has remarkably similar needs in terms of large, precision-manufactured wafers made in clean rooms.

It's always risky to enter new markets, and as some predicted, MEMC lost focus -- and market share. Adding further risk, MEMC acquired SunEdison at the end of 2009, becoming an even bigger player in the solar power segment. SunEdison has been aiming to build large-scale photovoltaic projects, competing directly with the utilities sector. That move consumed lots of cash and has yet to throw off the robust cash flow the company had hoped for. A range of unforeseen problems getting the business going has led MEMC to miss profit forecasts in six of the last eight quarters.

But all of those problems now appear under control, highlighted by SunEdison's recent sale of Rovigo, Italy's largest solar power facility. That removes a considerable overhang as investors had been concerned that MEMC would never recoup its massive investment. The replenished balance sheet surely helps.

Looking ahead, MEMC's operating divisions -- semiconductor materials, solar materials and the SunEnergy unit -- all look to be in better shape in 2011. That's why analysts at Citigroup think operating cash flow, which has been weak or negative since 2009, is likely to surpass $750 million in 2011. That should help the bottom line to perk up. "We think there is increasing evidence that this business model can drive at least $1.75 in EPS [earnings per share] power within two years, if not much earlier," wrote Citigroup's analysts in a recent note.

Consensus estimates anticipate EPS of around $1 in 2011. If EPS moves toward $1.40 in 2012 (below Citigroup's bullish view), and investors take note of the cleaner operations and assign a multiple of 13 times projected 2012 profits, then shares may move toward the $18 mark -- roughly 50% above current levels.



2. Leapfrog Enterprises Inc. (LF)


This maker of educational toys showed all the signs of an impressive rebound throughout 2010. Back in July, I wrote about the stock as shares traded at $4.50. I mentioned it a few more times in 2010 as the stock eventually moved up past the $6 mark [See "4 Attractive Stocks Under $6," and "My 3 Favorite Small Cap Stocks for 2011."]

Leapfrog's momentum seemed to build throughout the year and all signs pointed to impressive 20% to 25% growth, setting the stage for even more growth in 2011. But just last week, management noted that holiday sales fell short of expectations and full-year sales growth would be closer to 13% to 14%. That led to an especially deep profit shortfall, and shares took a quick hit and are right back in the low $4-range again.

At this point, lower expectations have been set for 2011, but considerable promise remains. Leapfrog is surely hurting from tepid reaction from the company's Tag reading system toys, but the Leapfrog handheld Explorer game segment, which accounts for 40% of sales, is seeing very strong demand. And Explorer hardware sales are often followed by rising demand for higher-margin software that runs on the platform.

Analysts at Needham recently took down their 2011 EPS forecast from $0.78 to just $0.47. Yet they still think shares will trade up to around $7 on the basis of a projected rebound to a multiple of eight times EBITDA on an enterprise value basis. Leapfrog has also once again become the target of buyout rumors (though that alone is not a reason to buy a stock).

Leapfrog is not growing as quickly as had been hoped, but is growing nonetheless. Management has steadily rebuilt a once-broken company, though a little more work remains.

3. Citi Trends (CTRN)

This urban-focused retailer finally cooled off in 2010 after a long-string of better-than-expected quarterly results. The retailer delivered an unexpected loss in the July quarter, noting a sharp drop in foot traffic after the economy slowed down anew in the summer.

Only a few years ago, this was a very hot stock: sales grew at least 25% every year from 2003 to 2007, and shares hit $50 by 2006. These days, they trade for half of that value as growth has cooled to the low-teens. That growth rate is coming from a still-expanding base of stores. A healthy balance sheet, with $75 billion in cash, is leading to 15% annual increases in the store count.

Negative same-store sales growth trends are masking that expanding footprint right now. But when sales stabilize, revenue should rise at a 15% clip. If sales levels return to pre-recession levels, then companywide revenue could really spike higher.

As unemployment will be slow to drop, sales growth will still be constrained in 2011 -- though the company could exit the year with more momentum. If that's the case, then shares may trade up to around 20 times projected fiscal (January) 2012 profits (20% is likely the earnings growth rate that will return when sales stabilize and rebound). By that math, shares could hit $35 -- or 40% above current levels.

Action to Take --> All of these stocks have seen tough sledding in 2010, though their business models are merely stalled -- not broken. A slightly better economy could yield better results for each of these companies. MEMC, with around 50% upside and a host of positive drivers soon to be evident, looks like the most compelling name in this group for near-term gains. As 2011 unfolds, Leapfrog and Citi Trends may also see more interest.

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-- David Sterman

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

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