The Blog of Evermore

Three out of Favor Stocks to Consider: LSI, COCO, ATEC

October 1st, 2010

These three stocks are in very different sectors but have one thing in common. They’ve all been beaten down lately by factors that may not be as bad as the their respective sell-offs dictate..

LSI is in the business of designing, developing, and marketing semiconductors used in networking and storage systems. These are two areas that should experience growth over the coming years, despite the challenging economic times ahead of us. With the advent of cloud computing and more and more emphasis on mobile web-based devices, demand for LSI’s products should be strong.

Shares of LSI traded in the $5 – $6.50 range for the first half of 2010 before coming under pressure this summer. LSI was downgraded by Lazard Capital in July due to weakness in the PC supply chain. This sent the stock on a downward path that brought it down to the $4 range. At this price, insiders promptly jumped in at bought about 150,000 shares.

For this and the following three reasons, I saw this as a buying opportunity.

• Analysts are focused on the near term, by that I mean the next several quarters out. As a longer term investor, I don’t care as much about that.
• Networking and storage requirements will only grow as the internet continues to usurp the personal computer. While the lessoning emphasis on the personal computer does have a negative impact on LSI, this accounts for about 20% of its business which means that 80% is poised for growth.
• I was able to pick up shares of LSI at $4.48 which translates to less than 8 times the lowered 2011 estimates.

COCO – Corinthian Colleges is a for profit post-secondary education company. This sector was slammed over the summer due to the Department of Education proposal to crack down on extending loans to students attending these institutions due to the poor repayment record of their graduates. Corinthian quickly went from an $18 stock to a $4 stock.

Again, the concern is legitimate, but the risk-reward ratio was hard to pass up. The baby boomlet of the early nineties means that there are large numbers of young adults seeking advanced degrees. Many of these individuals cannot afford or do not desire to attend a traditional four year institution.

Trading at less than 5 times current year earnings projections and seeing insiders jumping in convinced me to take a small position in this stock. If nothing else, it will be some time before anything is resolved on this and at some point, the stock is likely to bounce back enough to make this a successful investment. I wish I had been on top of this when it was at $4.00, but I’ve already seen it go up almost a $1.00 since I got in at $6.24.

ATEC – Alphatec Holdings. Alphatec is in the business of providing products for the surgical treatment of spine disorders. Similar to LSI, Alphatec spent most of 2010 in the $4 – $7.00 range. That was until they missed on revenue and earnings in the second quarter. The stock promptly lost half of its value and sits today just over $2.00/share.

There’s a lot in flux at Alphatec as they digest the acquisition of a French based spinal products company (Scient’x S.A.). This combined with pricing pressure being experienced by all players in this niche and the inclusion in their revenue guidance of a Japanese subsidiary that is being divested, all added up to the disappointment. The company’s oversight is being promptly exploited by opportunistic law firms who are ostensibly looking out for the ATEC shareholders.

Short time horizon holders aside, the growth prospects for ATEC are still solid. Yes, the pricing pressures are a concern and the most significant risk is probably the reimbursement rates that health insurance carriers will be willing to pay. However, there’s no denying the demographics in the developed world are in Alphatec’s favor. Interestingly, in the days just before I started looking at Alphatec, I heard of two people I know who are or may be suffering from spinal stenosis. This is the kind of observation that would make Peter Lynch proud.

Alphatec has several products in the pipeline in addition to their core products already on the market. With their recent acquisition, they have a global reach into Europe, Asia and to a lesser extent Latin America.

The second quarter earnings disappointment is behind them and the lawsuits will eventually work themselves out one way or the other. The company has a strong balance sheet with lots of cash so future dilution should be limited.

Analysts who were caught off-guard with the earnings disappointment promptly lowered their recommendation to hold from buy (they had placed a buy on it when it was close to $6 a share). I think they’re a little whipsawed having issued the buy at this price and now placing a hold when it’s at $2.16. The downgrade has nothing to do with the sector or the products that Alphatec produces. Again, I think these downgrades are looking only a few quarters out. The buy ratings will probably come back when this stock has doubled again to over $4/share. In fact, one firm (Stifel Nicolaus) that initiated coverage AFTER this latest earnings released has initiated coverage with a buy rating.

The stock may not move much for the rest of the year, but it would appear to have no where to go but up from here.

Entry Filed under: Finance