Three Actionable Trading Ideas Right Now
On the first trading day of the New Year the U.S. stock market exploded higher in the wake of a last-minute Congressional deal to avert the fiscal cliff. Investor exuberance sent the Dow Jones Industrial Average rocketing more than 300 points higher to over 13,400.
The Nasdaq did even better, starting 2013 with a tidy three percent gain. In terms of stock market history, Wednesday's trading session was nearly unprecedented for the opening day of a New Year.
Investor enthusiasm is riding high and market participants are hoping that the huge rally is a sign of things to come in 2013. Historically, when the stock market moves higher over the course of the first five trading days of January, there is an 86 percent chance that stocks will close the year with a gain.
This phenomenon is referred to as the "January effect," and the market rises nearly 14 percent on average when it is triggered. With the uptrend that began in March 2009 still firmly intact it may be time for individual investors to put more capital to work. Below, Benzinga offers readers three actionable ideas that could bring near-term profits this month.
Herbalife (NYSE: HLF) - In recent weeks, multilevel marketing company Herbalife has been one of the most volatile and talked about stocks on the New York Stock Exchange. The company sells nutritional and weight-management products through third-party distributors who are compensated on both sales and recruiting of other distributors.
Over the last month, the stock has fallen around 30 percent on massive volume after billionaire hedge fund manager Bill Ackman revealed that his firm is short more than $1 billion of the stock. The Pershing Square Capital Management founder disclosed his massive bearish bet against the company on December 20th at the Ira Sohn investment conference during a three hour presentation which included 342 PowerPoint slides.
Ackman's essential thesis for the trade is that Herbalife, despite consistent and prolific sales and profit growth, is a pyramid scheme which will eventually come under intense regulatory scrutiny or collapse. The hedge fund manager said that Herbalife is his highest conviction short ever and that his price target for the stock is $0.
While Ackman has clearly done his homework on the trade, not everyone is convinced. A number of Wall Street analysts immediately came to the defense of the company and were critical of the hedge fund manager's research and conclusions. In fact, D.A. Davidson analyst Timothy Ramey said that the stock was a "Best Idea" for 2013 on Wednesday. He has a "Buy" rating on the shares and a $72 price target.
Herbalife CEO Michael Johnson also provided an aggressive response to the accusations leveled against his company and said that Ackman was engaged in "blatant market manipulation." He said that “This appears to be another attempt to illegally manipulate the market by a group of short sellers.” The company also released a statement calling the presentation “a malicious attack on Herbalife's business model based largely on outdated, distorted and inaccurate information.”
In recent days, the stock has bounced back strongly from its worst levels. Shares bottomed out on December 24 at around $25 and have subsequently jumped almost 29 percent from that level to $32.20. Looking ahead, there is a very specific catalyst that could provide more near-term upside in the name.
Herbalife has scheduled an analyst and investor meeting for January 10, 2013 in New York. At this meeting, Herbalife will provide comprehensive responses to questions about its business model and address Ackman's accusations in detail. It will also update investors on its business and growth prospects. In addition, Herbalife has retained Moelis & Company as a strategic advisor to defend itself against the attacks against the company.
Although this is a risky situation, being long HLF into this analyst meeting could pay off handsomely in a short period of time. Along with this catalyst, Herbalife also has $950 million remaining on its existing $1 billion share repurchase authorization and there is a good chance that it will deploy this money in an effort to fight back against Bill Ackman and other short-sellers. At current levels, Herbalife has a market cap of just under $3.5 billion so the company could buy back a huge chunk of stock in light of the steep sell-off.
Facebook (NASDAQ: FB) - Don't look now, but Facebook has convincingly broken its lengthy downtrend and is now moving aggressively higher. The stock opened the New Year with a better than 5 percent gain and is now trading at $28. Although shares are still down around 26 percent from their $38 initial public offering price, the stock has surged roughly the same amount over the last three months and is sitting at its best levels since late July.
There are a number of near-term catalysts that could continue to propel Facebook in the month of January. The most important of these catalysts is the end of the lock-up periods in the stock. The final large lock-up expired on December 14 when 156 million Facebook shares began freely trading.
When the company went public in May, a massive number of shares held by employees and early investors were prohibited from trading for a period of time. This is commonplace in the IPO process, but it seems to have been a particularly burdensome headwind for Facebook's stock price. These lock-ups were staggered over time and were a source of large-scale selling when they expired.
This dynamic seems to have been driven in part by momentum. In the weeks and months after Facebook came public, the IPO tanked badly. The reasons for this included a very rich initial valuation combined with a large offering of shares, among other things. As the stock plunged, concerned investors became much more apt to dump large numbers of Facebook shares as they were subsequently "unlocked."
When PayPal co-founder and early Facebook investor Peter Thiel sold a huge chunk of his stock in August the sell-off in the social networking giant accelerated and prices hit new lows. The lock-up headwind has now been removed from the stock and Facebook is regaining its luster in time for the New Year.
Analysts are also turning decidedly bullish on the stock and that could lead to more significant gains in January. On Wednesday, analysts at JP Morgan (NYSE: JPM) reiterated their "overweight" rating on the shares and bumped their price target by $6 to $35.
In a client note, JP Morgan analyst Doug Anmuth wrote, “We are incrementally positive on Facebook shares into 2013 as we believe it remains very early in the trajectory of Facebook's mobile advertising, and recent marketer feedback on mobile and News Feed ads has been positive."
The investment bank also raised its revenue estimates for the company's Mobile News Feed to $2.37 billion in 2013 and $4.0 billion in 2014 versus its previous projections of $2.0 billion and $3.3 billion, respectively.
Similar sentiments were reflected by Morgan Stanley (NYSE: MS) analysts on Wednesday. They also lifted their earnings and revenue estimates for the company and raised their price target on the stock to $32 from $31. Morgan Stanley has an "overweight" rating on the shares and is bullish on the company's mobile prospects.
In a client note, they wrote "Facebook is making strong progress in mobile monetization, and has introduced new revenue-generating products such as a real-time bidding exchange and gifts."
The firm lifted its long-term revenue and earnings estimates by 2%-4% and is modeling EPS of $0.52/$0.85/$1.15 for fiscal 2012 through fiscal 2014. In light of the multiple catalysts that have converged around the New Year for Facebook shares, this could be a name that investors can ride to profits during the first part of 2013.
AbbVie (NYSE: ABBV) - On Wednesday, Abbott Labs (NYSE: ABT) completed a planned spinoff of its pharmaceutical division into a separate publicly-traded company known as AbbVie (ABBV). The stock climbed 2.8 percent on the day and closed at $35.12.
The goal of the spinoff, which was announced in 2011, was to unlock shareholder value for Abbott investors by creating two independent companies with distinct business lines. Prior to the completion of the deal, Abbott was one of the largest healthcare companies in the world and the two companies will remain among the most dominant in their respective sectors with market capitalizations above $50 billion.
The spinoff entity, AbbvVie, includes in its portfolio the anti-inflammation drug Humira, the painkiller Vicodin, and cholesterol drug Niaspan. Abbott Labs' products include cardiac stents, nutrition items and diagnostic tests along with well-known brands such as Ensure and Pedialyte.
Abbott's chairman and CEO Miles White called the event "the most transformative action" in the company's 125-history. AbbVie CEO Richard Gonzalez said that with his company's existing assets and focus on innovation "we intend to create significant value for our shareholders."
Investors should keep an eye on both of these stocks as similar transactions have resulted in big gains in recent years. Two of the most prominent have been Expedia's (NASDAQ: EXPE) spinoff of TripAdvisor (NASDAQ: TRIP) and Conoco's (NYSE: COP) spinoff of Phillips 66 (NYSE: PSX).
Since the two companies split in December 2011, Expedia shares have soared more than 110 percent while TripAdvisor is up over 70 percent. Similarly, Phillips 66 is up almost 69 percent since being spun-off by ConocoPhillips in May 2012. Conoco shares have gained around 5 percent during the same time period.
Although these type of gains for Abbot Labs and AbbVie may not be likely, in large part because of the sheer size of both companies, both stocks could benefit significantly in the coming year.
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