Friday, April 23, 2010
If you're looking to make gains of over 100% on a stock, the best way is to buy a company everyone else hates.
How do you know a hated stock? Well, they tend to trade near their 52-week lows. And they have very few – if any – "buy" ratings from institutional analysts.
That's why they can be so profitable. The price and sentiment are so low, even a small positive – like earnings that meet expectations – can push the stock higher.
For example, look at video game designer Take-Two Interactive. In December, the company said it would report a steep earnings loss in 2010 due to further title delays.
The stock fell 30% on the news to below $8. To put the price in perspective, in 2008, rival Electronic Arts offered to buy Take-Two for $26 based on its Grand Theft Auto franchise – which Take-Two still owns.
In my Penny Stock Specialist advisory, we used the pullback to buy shares. A few weeks later, billionaire investor Carl Icahn began buying the stock. The news pushed Take-Two higher. Then, Take-Two reported upbeat earnings guidance. My subscribers have gains in excess of 30% in a few months.
We've seen the same thing happen with Starbucks (up from $8 to $26) and Citigroup (up from $1 to $5). Most people hated these stocks at their lows.
Today, I'm seeing one stock setting up for similar gains. Right now, it's the most hated stock I know. When I found it, it was trading near its lows for the year. Just four analysts rated it a buy – out of 28. But I only discovered how hated it was when I told my Penny Stock Specialist readers to buy it... and the irate e-mails poured in.
I guess I shouldn't have been surprised. Medical-device maker Boston Scientific (BSX) is trading near a 10-year low. It suffered three massive one-day drops over the past six months. And it's down about 40% from its August high. In other words, a lot of people lost a lot of money on BSX.
In the past four months, the company had to pay Johnson & Johnson a $1.7 billion settlement. Then, management lowered its full-year earnings guidance. Finally, in mid-March, the FDA ordered the company to pull all of its implantable cardioverter defibrillators (ICDs) from the market. ICDs account for about 15% of BSX's revenue.
Shares collapsed to a 10-year low.
Saying that BSX has had its share of problems is an understatement. In other words, I understand why my readers – and a whole lot of other folks – hate this stock. But based on my research, there's huge upside from these levels. Let me explain why...
BSX is going through massive restructuring. Last quarter, management announced it would cut some of its 25,000 full-time employees. Cutting the payroll will push the bottom line (earnings) higher. We saw this trend for most stocks throughout 2009: Earnings soared while sales were mostly in line with expectations.
Also, BSX's market is expanding. The company makes a large portion of its revenue from stents. Stents are tubes of metal mesh that open up arteries to increase blood flow. More patients are choosing stents over bypass surgery. And on February 27, the American Stroke Association published a report showing people at risk of stroke because of narrowed neck arteries can now be treated with stents.
Finally, sentiment has never been so low. Out of the 27 analysts covering the stock, only four have rated it a buy. Goldman has the stock on its "conviction sell" list. Plus, I haven't seen one positive write up on this stock in over four months.
Before the FDA debacle, the lowest price target on BSX was $7 per share. Last week, BSX received FDA approval to bring its ICDs back on the market. And shares are trading right around $7.
Earnings over the next few quarters will stabilize from cost cutting. If BSX sees stronger demand for stents or its ICDs, the stock could soar from this depressed level.
I reiterated my buy rating on BSX in the latest Penny Stock Specialist. My readers may hate the stock... but that's one reason I love it.
New highs for Boeing... defense/aviation giant leaps 40% so far in 2010.
Office furniture companies HNI, Herman Miller, and Steelcase reach fresh highs.
Building materials gain continues... new highs for USG, Fastenal, and Valspar.