Market volatility increased this week, as we experienced
quadruple-witching options expiration, the rebalance of
the S&P 500. For the second straight Friday, a sharp
selloff sent the Russell 2000 into negative territory for
the week. Once again, the small-cap index (which serves
as the benchmark for our model portfolio) underperformed
the broader U.S. stock market averages, including the S&P
While not all low-dollar stocks are small-caps, we
believe this decline is overdone, so we put some cash to
work in the model portfolio this week. We began by
initiating a position in Sonus Networks (SONS:Nasadq) on
Wednesday. The company makes communications equipment and
returned to profitability in 2013. We believe Sonus is at
an inflection point and that management can continue to
expand the company’s margins in the coming quarters.
Next, on Friday, we added to our positions in Active
Power (ACPW:Nasdaq), Vantage Drilling (VTG:NYSE) and
Yamana Gold (AUY:NYSE). In addition, we raised our rating
on Yamana from a Two to a One.
We digested a lot of economic data this week, including
the latest report from the Federal Open Market Committee
(FOMC).Next week’s calendar is also busy. We’ll get some
regional economic readings and housing data in the first
half of the week, followed by durable goods orders on
Thursday. Friday brings the final revision on second-
quarter GDP growth.
As a reminder:
-- A Game Breaker is going to change the landscape of an
industry, as Intel (INTC:Nasdaq), Microsoft (MSFT:Nasdaq)
and Wal-Mart (WMT:NYSE) did in their sectors. Investors
can make big money in these stocks by getting in before
-- Inflection-Point stocks have a broken business model
that's on the mend but have yet to be recognized by the
market. Investors who recognize a turnaround early can
pocket strong returns.
-- Stealth Stocks are often names unknown to the general
public but can be hugely profitable investments --
especially when they have catalysts to boost their share
Also, Ones are stocks that we would buy at their current
quotes, Twos are stocks that we would buy on a pullback,
and Threes are names that we would sell into strength.
Active Power (ACPW:Nasdaq; $1.97; 3,050 shares; 3.26% of
the model portfolio; Game Breaker; $4.75 price target):
Active Power's flywheel energy technology keeps its
customers' mission-critical processes up and running. Its
hardware uses half as much space as existing technologies
do, but it generates twice as much power. We bought 325
shares on Friday, as the stock set a new low this week.
The company’s core business remains strong and we believe
the shares have limited downside potential.
Atmel (ATML:Nasdaq; $8.49; 900 shares; 4.14%, Inflection
Point; $10 price target): The company makes
microcontrollers that are used in electronics. It was a
volatile week for the stock, which fell 2%. We believe
that management can continue to expand the company’s
margins in the coming quarters.
Ballantyne Strong (BTN:Amex; $4.15; 2,500 shares; 5.62%;
Stealth Stock; $6.25 price target): The company
distributes digital movie projectors and manufactures
screens and lighting equipment for theaters. It was a
quiet week for the shares, which fell 3%. Ballantyne has
a solid balance sheet and we believe the stock deserves
to trade at premium to tangible book value.
Builders FirstSource (BLDR:Nasdaq; $6.15; 1,300 shares;
4.33%; Inflection Point; $10.50 price target): The
company distributes materials to homebuilders in the
southern U.S. The stock lost 4% this week. Builders
FirstSource is leveraged to robust activity in its region
and we believe that management can continue to expand
margins in the coming quarters.
Cott (COT:NYSE; $7.36; 900 shares; 3.59%; Stealth Stock;
$10 price target): Cott produces and distributes soft
drinks, noncarbonated beverages and bottled water,
primarily focusing on private-label items for major
retailers. The shares moved fractionally lower this week.
We continue to favor the company for its attractive 3.2%
Extreme Networks (EXTR:Nasdaq; $4.80; 1,350 shares;
3.51%; Inflection Point; $8.75 price target): The company
makes Ethernet switches and recently doubled its size
with the acquisition of Enterasys Networks. Although the
stock dropped 7% this week, we believe the company offers
investors growth at an attractive price.
McDermott (MDR:NYSE; $6.34; 975 shares; 3.35%; Inflection
Point; $11.50 price target): This engineering-and-
construction firm focuses on building and designing
offshore oil and natural gas facilities. The stock moved
fractionally lower this week on little news. We remain
convinced that the new management team is turning the
business around so we would add to our position, on the
next market pullback.
Pacific Sunwear (PSUN:Nasdaq; $2.00; 3,050 shares; 3.31%;
Inflection Point; $4 price target): This specialty
retailer operates more than 500 stores in the U.S.,
selling surf- and skating-style apparel to teens and
young adults. It was a quiet week for the shares, which
dropped 3%. We believe the retailer can continue to
deliver consistent results in a choppy retail
SandRidge Energy (SD:NYSE; $4.77; 1,450 shares; 3.75%;
Inflection Point; $8 price target): The company explores
for natural gas and oil in the U.S., primarily onshore.
The stock moved 3% lower this week on little news,
despite reports of some insiders buying shares on the
open market. We agree that SandRidge has limited downside
potential, as we expect management can ramp up production
and cut costs in the coming quarters.
Sonus Networks (SONS:Nasdaq; $3.76; 1,000 shares; 2.04%;
Inflection Point; $5.25 price target): The company makes
communications equipment, including session border
controllers and diameter signal controllers. We initiated
a position on Wednesday by purchasing 1,000 shares.
Standard Pacific (SPF:NYSE; $8.00; 750 shares; 3.25%;
Inflection Point; $11 price target): This homebuilder
generates the majority of its revenue in California. The
shares marked time this week. The company has strong
pricing power and we remain convinced the stock can move
up toward the double digits in the coming quarters.
Synovus Financial (SNV:NYSE; $24.89; 264 shares; 3.56%;
Inflection Point; $33.25 price target): This Georgia-
based bank operates branches throughout the Southeast.
The shares were little changed this week, even though
Raymond James upgraded the stock to Strong Buy from
Outperform on Friday. The current interest rate
environment will likely continue to favor the banks and
we believe that Synovus can post above-average growth in
the coming quarters.
TherapeuticsMD (TXMD:NYSE; $5.30; 1,925 shares; 5.53%;
Game Breaker; $9.50 price target): The company is
developing hormone-replacement medicines for women. The
shares gave back gains from last week and lost 15%. Even
so, TherapeuticsMD has an attractive clinical pipeline,
with multiple potential catalysts.
Yamana Gold (AUY:NYSE; $6.75; 1,125 shares; 4.12%;
Inflection Point; $12.50 price target): This gold-and-
copper exploration company operates seven mines and
several ongoing development projects in Brazil, Argentina
and Chile. We bought 100 shares on Friday, as the stock
fell 7% this week. We also raised our rating on the name
from Two to One. The underlying price of gold appears to
have stabilized and we believe management can post solid
growth in the company’s core mining assets.
Depomed (DEPO:Nasdaq; $14.72; 250 shares; 1.99%; Game
Breaker; $15.75 price target): The company markets
specialty drugs around its oral drug-delivery system,
Acuform, which are used to treat Type 2 diabetes as well
as post-shingles pain. The shares added fractionally to
recent gains this week. Depomed received confirmation
from the Food and Drug Administration on Wednesday that
its Gralise product will receive seven years of patent
exclusivity as an orphan drug. We assert that the stock
can trade up toward our price target by the end of the
Huntington Bancshares (HBAN:Nasdaq; $10.08; 600 shares;
3.28%; Inflection Point; $11 price target): This Ohio-
based bank operates more than 600 branches across six
states. The shares ticked higher and added to recent
gains this week, as there were few surprises in the
company’s stress test results, which were released on
Thursday. Even so, Huntington has nearly doubled from our
average cost-basis and we would consider booking profits
into the next market rally.
Martha Stewart Living Omnimedia (MSO:NYSE; $3.98; 1,350
shares; 2.91%; Inflection Point; $5.75 price target): The
company operates in the home-goods segment, publishing
magazines, producing broadcasts and licensing products to
retailers. The stock dropped 4% this week on little news.
We believe that the shares are attractive to purchase
below $4, as management will continue to unlock value
from the company’s core brands in the coming quarters.
ON Semiconductor (ONNN:Nasdaq; $9.78; 700 shares; 3.71%;
Stealth Stock; $11 price target): The company makes
analog, standard logic and discrete semiconductors for
use in data and power management. The stock rebounded
fractionally this week. We remain certain that the stock
offers value, as it is trading at 10x expected 2015
Unilife (UNIS:Nasdaq; $2.46; 2,350 shares; 3.13%; Game
Beaker; $6.50 price target): This manufacturer of
retractable and prefilled syringes offers products with
convenience, safety and comfort advantages. The stock
dropped 4% this week on little news. Even so, we believe
that management will continue to announce new
pharmaceutical partnerships in the coming quarters.
Vantage Drilling (VTG:Amex; $1.50; 6,400 shares; 5.20%;
Inflection Point; $2.25 price target): This offshore
driller contracts its rigs for the exploration of oil and
natural gas. We bought 500 shares on Friday, as the stock
fell 11% this week. Even so, the underlying price of
crude oil appears to have stabilized. Vantage’s fleet is
fully booked for the next couple of quarters and we
believe that the stock can rebound by 20% by the end of
Zix (ZIXI:Nasdaq; $3.64; 2,050 shares; 4.04%; Stealth
Stock; $5.75 price target): The company is a leading
producer of email-encryption software that enables
doctors to automatically send information to pharmacies.
The shares pulled back 8% this week, on little news. Even
so, Zix has a lot of sales momentum and we believe the
stock can trade up toward $5 in the coming quarters.
Kodiak Oil and Gas (KOG:NYSE; $14.04; 300 shares; 2.28%;
Inflection Point; $17 price target): The company explores
for oil and gas in the Williston Basin and the Green
River Basin. The shares moved 4% lower this week. Even
so, underlying energy prices appear to have stabilized
and we believe its acquisition of Whiting Petroleum
(WLL:NYSE) makes strategic sense.
Swift Transportation (SWFT:NYSE; $20.27; 125 shares;
1.37%; Inflection Point; $27 price target): This trucking
company transports goods throughout the U.S. and Mexico.
It was a quiet week for the stock, which lost 4%. That
said, we believe management can continue to deliver
consistent growth in the coming quarters.
David Peltier & the TheStreet Research Team
The stock is down quite a bit this year but we continue to believe in the growth potential of the company's technology.
We are putting some cash to work this morning by adding shares to Yamana Gold and Vantage Drilling.
We believe this communications name is a company on sale and the stock is on the cusp of a positive inflection point.
We put some cash to work in the model portfolio this week, initiating a new position and adding shares to two existing holdings.
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