Let’s Play the Market We’ve Been Dealt!
The S&P 500 rose over 8% in October, which was a rare sight. It sure was exciting, and came as a great relief after the China-induced stock market correction in August-September. However, markets don’t rise 8% in four weeks without then receding somewhat. Similar to a person eating a 5,000-calorie Thanksgiving dinner then falling into a food coma, the stock market needed to digest that big upward move.
The good news is that the S&P 500 is likely heading back to 2,100 this month. The bad news is that it’s then likely to continue the sideways trading that we saw in the first half of 2015.
Today, we’re going to take the bull by the horns and play the market we’ve been dealt. If it’s hard to find stocks that are eager to break out and run, then let’s look for growth stocks that are rebounding from recent lows. Such bargains can appeal to both traders and buy-and-hold investors.
This Growth Stock is Rebounding from Recent Lows
Universal Electronics (UEIC) is a manufacturer of wireless remote control products, software, and accessories for home entertainment systems. The company sells its products and services throughout the globe, and is based in California. Customers include retailers; and a wide variety of technology companies, including television service providers, OEMs, software companies and computer companies.
Product demand is being driven by technological innovations, and improvements in consumer spending patterns. Demand is increasing in the areas of smart phones and tablets, and slowing in more saturated markets, such as flat-screen TVs.
Universal Electronics’ CEO, Paul Arling, was honored this fall by the Orange County California Technology Alliance. He received an award for “Outstanding Public Company CEO,” for both product innovation and impressive financial performance.
The company’s total revenue and net income doubled, growing steadily over the last six years, with 2014 revenue reaching $562 million, and net income reaching $32.5 million. Investors can expect fourth-quarter 2015 results to be reported on February 17, 2016.
The Wall Street consensus earnings per share (EPS) growth estimates reflect expected increases of 7.5% and 21.5% in 2015 and 2016 (December year-end). The 2016 price/earnings ratio (P/E) is 15.3; low in comparison to the EPS growth rate, making the stock undervalued.
Universal Electronics carries no long-term debt, and the stock does not pay a dividend.
A Better Option than Apple (AAPL)
UEIC shares rose about 70% in 2014, reached an all-time high of $66.75 in February 2015, then fell 39% to their September 2015 lows. Not coincidentally, the company had aggressive earnings growth in 2014 and slow earnings growth in 2015.
In November 2014, after several months of buy recommendations, I warned investors of the impending 2015 earnings slowdown at Universal Electronics, and advised them to use stop-loss orders.
On average, stocks rise the most during years when their earnings are rising aggressively, especially when a stock’s P/E is much lower than its EPS growth rate. Now that UEIC has prospects for aggressive earnings growth again in 2016, the stock price has turned upward.
Professional portfolio managers make their decisions based on current full-year EPS estimates; or if it’s late in the year, they use next year’s estimates. They do not go by quarterly numbers or last year’s numbers. Since professional portfolio managers drive the markets, insight into their actions helps us better understand the nuances of stock investing.
Another excellent example of earnings-driven price action can be seen with Apple (AAPL). The stock price surged in fiscal 2015 (September year-end), because the company’s EPS grew 43% that year. But as Apple’s 2016 fiscal year approached, the stock price stalled out then fell a lot. Why? Because Wall Street analysts project Apple to have earnings growth of only 6% in 2016 and 10% in 2017!
While investors are getting all excited about Apple’s products, professionals are laser-focused on Apple’s profits. There’s no compelling reason to own a stock with 6% EPS growth, when you can find stocks like UEIC with projected 21% EPS growth.
Not only is there no more earnings excitement on the horizon for AAPL, but the stock no longer meets the investment criteria for many growth stock mutual funds. Their selling action will push the price down. There’s no corresponding motivation for index funds or growth & income funds to buy the stock. They already own the stock!
Back to UEIC. The stock has most recently been trading between 48 and 53.50. Barring unforeseen bad news, I expect UEIC to finish trading in that range very soon, then move higher, to a range of 54 to 59; then rise to the low 60s, where it traded a year ago. (Some stocks have extremely predictable trading patterns, which can be easily seen on their stock charts.)
UEIC is a volatile small-cap stock. Barring unexpected bad news, there’s not much risk in the stock price right now, since it had a big price correction earlier this year, and earnings prospects are looking rosy. UEIC is a good choice for aggressive growth investors, bargain hunters, value investors, and traders with a three-month time horizon.
Merry Christmas and Happy Investing,
Crista Huff
Chief Analyst, Smart Investing in Turbulent Times
