Our Analysts Made 3 Big Buys. Here's Why.
Jul 12th 2012 3:06PM
Updated Jul 12th 2012 3:10PM
About a year ago, I started touting real-money stock picks from our team of analysts. Specifically, I focused on five defensive picks our analysts had made in the face of an uncertain market. Those five picks have gone on to return 20%, outpacing the market by nine percentage points.
Since then, our analysts have continued to make real-time, real-money stock picks for the world to see. Today I'm going to focus on three of the big purchases our analysts have made this month and why they made them. At the end, I'll offer you access to a special free report on a few stocks that could skyrocket after this year's presidential elections.
SUPERVALU (NYSE: SVU )
Jim Royal may be regretting his latest real-money buy of chain grocer SUPERVALU. It's not that the parent company of grocers like Jewel/Osco and Albertson's is at the leading edge of its industry; it's that Jim believes the stock is deeply misunderstood.
New management in place is devoted to paying down debt, the No. 1 factor holding things down for the company. "It's committed to paying off as much as $450 million more this year, and free cash flow for the next few years should comfortably cover maturities," wrote Jim. "You can see the debt market's comfort with SUPERVALU's situation in bonds that trade near or above par." Trading at just four times expected earnings, Jim saw shares as a steal.
Unfortunately for shareholders, the company just came out with second-quarter earnings and things weren't pretty. Sales were down 4.7%, and earnings were down 46%.
But the real shot to the gut was the suspension of the company's 6.8% dividend. Shares have almost been cut in half today, as the company said the move was necessary to provide financial flexibility.
If you still believe in the turnaround strategy, and don't mind not being paid a dividend, today's move might offer a welcome entry point. Otherwise, it's probably best to watch from the sidelines.
Netflix (Nasdaq: NFLX )
There's probably no company that's experienced a roller-coaster ride comparable to that of Netflix. Topping out at a heady $300 per share last summer only to lose 75% of its value over the next 12 months, there are few shareholders who have had the stomach to hold on throughout.
One of those who did hold was our own Jim Mueller, and he thinks now is the right time for you to join him. Though he was encouraged by Reed Hastings' announcement of 1 billion hours streamed during the month of June, Jim has three different reasons for buying in now.
First is the fact that while some analysts are worried about Netflix's content obligations over the next five years, with costs of as much as $4.8 billion, the revenue coming in should more than cover the costs. Second, the threat of competition isn't as scary to Jim as it is to others. And he's got a point. Even though Amazon (Nasdaq: AMZN ) and Hulu have been stalking Netflix for over a year, neither has really found an easy and popular way to grab subscribers. Finally, Jim argues that content providers are smart enough not to raise their prices so much that they price themselves out of the market, which means Netflix should be able to continue buying content.
Arcos Dorados (NYSE: ARCO )
Finally, international specialist Nathan Parmelee recently announced he'd be buying shares of Arcos Dorados, the "McDonald's (NYSE: MCD ) of Latin America." In the United States, there are roughly 22,350 people per McDonald's restaurant. In Latin American countries served by Arcos Dorados, there are a whopping 272,000 people per restaurant.
No, Latin America isn't the same as the U.S., nor do people there have the same level of disposable income, but at less than one-tenth the saturation, you can see the opportunity that Nathan likes. Rising wages in Latin America also hold promise to juice Arcos' returns.
There are, however, some risks to be aware of. First and foremost is the slowing of the Brazilian economy, Arcos' largest market. Furthermore, there's reason to worry if growth in China slows: "China is a big buyer of iron ore, copper, oil, and other basic commodities, and Latin American countries are big suppliers, making Chinese demand important to the region's growth," wrote Nathan. That being said, Nathan thinks the company is a buy at today's prices
No time like the present
If you'd like some ideas that will be a touch less volatile than these three stocks, check out our special free report "3 Dow Stocks Dividend Investors Need." Inside, you'll get the names and ticker symbols of these three American companies and why they're great companies to hold for the long run. Get your copy of the report today, absolutely free!