#$bita

The indices seem to be tired, but there is still a lot of great action in individual stocks. The video below takes a look at trends of the leading ETFs as well as some of the previously mentioned stocks to buy.

BITA – Bitauto Holdings Ltd. was an earnings play that was actually up a bit in the pre-market but once the market opened, it just collapsed. I had an immediate alert on it as it gapped down and watched as it was turning into my favorite type of play – the reversal trade. The increase in volume as it broke over $61.00 gave me the confidence to enter the trade at $61.29. I sold in stages for $1.16 and $1.49 per share in profit. I will continue to watch BITA this week to see if it can start to close the gap that was created today.

Up to this point in 2014, there are 60 stocks that have more than doubled YTD. What did they have in common early in the year?

59 out of 60 had a market cap of under 10 billion at the beginning of the year.

53 out of 60 had a float of under 100 million shares.

49 were trading under $25 at the beginning of the year.

3 are recent IPOs – $RDUS, $VTAE, $GPRO

19 out of the 60 are biotech. Another 4 are drug manufacturers. Industry momentum is a big contributor to individual stock performance.

Gold is about flat YTD. Gold miners have done even worse as a group. After a strong first quarter, they’ve been under tremendous selling pressure. There is one gold miner that has doubled YTD: RIC

13 were foreign companies. China is the most represented, followed by Israel with $SPCB, $TSEM and $RDCM

The growth of smart phone usage could be noticed everywhere, even in the stock market. 5 of the doubles in 2014 are semi-conductors: $SWKS, $VIMC, $TQNT, $RFMD, $TSEM. Two of the doubles are cyber security companies: SPCB and VDSI.

16 of the 60 doubles in 2014 or 27%, doubled in 2013 too. This is a substantial percentage.

While it is true that long-term momentum (longer than than 3 years) tends to mean-revert, 6-12 month momentum tends to continue. Often, the next big winner in the stock market has already doubled in the recent past. For example, take the Chinese $VIPS and $BITA. Both quadrupled in 2013, before they went up more than 150% in 2014. $VIPS more than doubled in 2012, too.

(Photo Credit: Bill Stevenson)

Friday is a relatively quiet day for earnings, with the exception of BitAuto (BITA), which you should definitely be paying attention to. BitAuto stock is up 148% year to date and the company’s rise fits into one of the more prominent stories of the year, the awakening of Chinese internet companies.

This year we’ve seen gargantuan IPO’s from Chinese e-commerce leaders Alibaba (BABA) and JD.com (JD). Shares of Alibaba have already returned over 65% from their September debut. Some of the smaller Chinese internet stocks including BitAuto are performing even better.

(Graph above from ChartIQ Visual Earnings)

Since we profiled BitAuto back in March, shares have doubled. This company is on an absolute tear for reasons which could have been foreseen. It caters to the emerging Chinese middle class and aims to disrupt a notoriously inefficient business, auto-dealerships.

BitAuto provides information on its website about car pricing, specifications, and dealership reviews and has an advertising business built on top of that. The earnings growth here is off the charts.

On Friday contributing analysts on Estimize are expecting BitAuto to report earnings of 55 cents per share. That would be an improvement of 23 cents (42%) compared to the same quarter of last year.

On the top line the Estimize community is looking for $97 million in revenue. That would be a 57% gain from last year and a moderate acceleration from the 46% and 53% year over year growth reported respectively over the previous 2 quarters of this year.

The growth and opportunity here is attractive. Car dealerships invariably add costs to the buying process and negotiating the price of a new vehicle is a hassle. It’s antiquated. The only people rooting for auto dealerships are the vendors themselves.

This is the same reason that Tesla (TSLA) is having problems with its direct selling model. Tesla wants to sell electric cars directly to consumers, and it provides all the same service and accountability that dealerships do, perhaps even more.

When you add a middleman to the buying processes, the consumer loses. BitAuto is trying to make the experience of purchasing a car more transparent, and that’s a noble effort.

Tuesday

Fossil

Upscale watch and fashion brand Fossil (FOSL) is set to report third quarter earnings on Tuesday. Contributing analysts on Estimize are expecting Fossil’s earnings per share to increase by 26 cents (16.5%) compared to the same quarter of last year. Revenues are expected to grow by 9% year over year to $883.61 million.

In the second quarter of the year Fossil saw its net sales of watches increase by 12% while net jewelry sales jumped 19% higher. The Estimize community is expecting total sales growth to slip to 9%, just below the 10-14% revenue growth range reported over the previous past 3 quarters.

Wednesday

Cisco

Expectations for the networking giant are tame. Contributors on Estimize are expecting total revenue to increase by just under 1% while earnings inch 2 cents per share higher than they came in during the 3rd quarter of last year.

Cisco’s (CSCO) earnings growth has decelerated in 2014 compared to last year, but the company’s results have still managed to come in ahead of the Estimize consensus on the bottom line over the 4 previous quarters. The stock is up roughly 14% this year and like others it has been ripping higher since the the middle of October when turbulent market conditions settled down and the market began to rally.

On Wednesday the Estimize community expects Cisco to edge past the Wall Street consensus by a penny per share on the bottom line and beat by less than 0.5% on revenue.

JCPenney

Distressed retailer JCPenney (JCP) is also set for a Wednesday afternoon report. Unlike Cisco, JCPenney’s stock never recovered from when it got slammed amid market volatility in late September and early October. Shares of the troubled department store company are down 30% from their mid-September highs.

Going into earnings contributing analysts on Estimize are looking for JCPenney to increase its sales by 2.8% compared to the same quarter of last year and lose a lot less money. In the third quarter of 2013 the company reported a loss of $1.81 per share.

This quarter analysts on Estimize are forecasting that the deficit will shrink to 78 cents per share, which is a nickel per share better than Wall Street is giving the company credit for. JCPenney is expected to cut its quarterly loss by about 57% which is a step in the right direction, but clearly this company still has a lot of work to do.

Thursday

Walmart

Over the past 3 quarters profit growth at the world’s largest retailer by revenue has stalled out. In the previous 3 periods earnings have fallen between 3% and 4% each quarter on a year over year basis.

Thursday Wall Street is forecasting that Walmart (WMT) will post another slim profit slide with EPS decreasing from $1.14 in the same quarter of last year to $1.12. However, contributing analysts on Estimize are more optimistic, expecting $1.16 in earnings per share.

US comparable stores sales at Walmart and Sam’s Club locations were completely flat last period excluding fuel sales. When you factor in gasoline same stores were up just 0.1% in the states.

US store sales were flat last period despite a 0.3% increase in store traffic. The rise in traffic was offset by a 0.3% decrease in the average money spent per customer.

Although US same store stores were flat last quarter, growth in e-commerce and international business helped drive a 3% total revenue increase. 3% growth is in the upper part of the 0% to 4% sales growth range the company has reported over the past 2 years. Thursday analysts on Estimize are looking for Walmart to report slightly ahead of the Street on the top line registering a roughly 3.7% revenue gain.

Friday

BitAuto

Our final pick for earnings releases to watch this week comes from Chinese automotive web company BitAuto (BITA). BitAuto provides information on its website about car pricing, specifications, and reviews and has an advertising business built on top of that. BitAuto makes information about buying a car more accessible to the emerging middle class in the world’s most populous nation, and that’s why the company has been thriving. Year to date the stock is up over 145%.

Over the previous 2 quarters BitAuto’s EPS has grown 100% and 109% on a year over year basis. On Friday contributing analysts on Estimize are forecasting that the online car company will report profits of 55 cents per share, locking in a 72% bottom line gain.

One of the very real problems stock traders face is knowing where to focus their attention. Some traders are restricted to certain sectors or sets of stocks, but, even then, quantitative screens can be a useful first step. For traders who have access to the entire universe of stocks, there are still easily over a thousand candidate names, once we’ve filtered for reasonable volume and a decent amount of trading activity. Where to start?

I’ll write more on this soon, but one useful place to start is with a list of short-term relative strength leaders. At the end of this post you will find a screen that has been very useful to me over the years, both for swing trading and daytrading. Even if you are a longer-term “hands off” investor, it may still make sense to look at a list like this, just to make sure you know what is going on in the market–most people read things about the market and other peoples’ opinions of the market, but we can learn about the market by reading the market itself–valuable perspective, that.

Consider this a starting point for idea generation. For practical trading, I’d go through the list and remove those names that are very overextended (LNKD?), and perhaps put them on another list to watch for trades at a later date. (If the market fails, some of these leaders will offer spectacular shorts. A list like this is not just a shopping list for long positions!) Personally, I’d focus my attention on names that are consolidating (e.g., TREX, TMH, THC–what is it with the T’s??) and perhaps look to buy them on breakouts. Also, you might notice some friends from last week on this list–very interesting to see how things come together.

(If you find a list like this useful, we do publish this list, and several other quantitative screens in my daily research with Waverly Advisors.)

Download (XLSX, 432B)

Last Tuesday, New Jersey became the 3rd state in the country to explicitly ban direct auto selling, effectively outlawing the sale of Tesla (TSLA) electric cars. Tesla forgoes the traditional model of selling cars through franchised dealerships and instead uses showrooms where Tesla employees can directly educate potential buyers about their product and tout the reasons for switching to electric. Why anyone would want to prevent a company like Tesla from reducing the global dependency on fossil fuels is one question, but why they would use anti-competitive practices to do so is a real doozie. And there only seems to be one plausible explanation. It’s the lobbying power of the New Jersey Coalition of Automotive Retailers (NJ Car).

The coalition correctly and unimaginatively pointed out that direct auto sales from a manufacturer to the customer without the intermediary step of a dealership would threaten its members’ livelihood. Okay sure, but since when has fear of competition ever been a valid excuse to prevent a free enterprise from doing business it’s own way? Our economy is based on the belief that companies should provide the highest quality product at the lowest possible price and let the consumers determine who the winners and losers are, not the government. And unless you happen to represent the less than 1% of people who sell automobiles for a living, you probably don’t care much for car salesmen anyway. The simple fact is that we don’t need them and this ban on direct auto selling is detrimental to 99% of New Jersey constituents. But even if we can’t have direct selling, there is hope. BitAuto is making huge strides in China to render auto-dealerships powerless, but more on BitAuto in a second.

One of the primary arguments against direct selling that Jim Appleton, President of NJ Car, made is that auto dealerships offer a public benefit in the event that a recall or warranty issue. Baloney. Do you know what Tesla did when there was a problem with the Model S riding slightly too low to the surface at highway speeds? They didn’t waste millions of dollars of time and money with an old-school physical recall, that’s for sure. Tesla released an over the air software update to each car’s central computer to automatically adjust the suspension and correct the problem. So, what else do auto dealerships do? They thrive on asymmetric information and feed on price discrimination, maximizing the amount that each individual will pay to purchase a car on a discretionary basis. Luckily on the other side of the world, BitAuto (BITA) is changing that.

BitAuto is a online content and marketing company that operates in China which seeks to increase transparency on auto dealerships, and they aren't happy about it. While they do provide advertising services to automotive dealers, BitAuto also allows buyers to browse and compare dealerships from the comfort of their own home. The emerging middle class in China is driving the auto market crazy there, and BitAuto is in great position to capitalize. Car buyers love having actual pricing information available on the web because it significantly weakens the power of dealerships to overcharge them.

Throughout the past 4 quarters BitAuto has been more profitable than Wall Street has predicted and the company’s revenue is small but growing rapidly. On March 6th BitAuto reported quarterly earnings of 43c EPS and $79.9M revenue compared to just 9c EPS and $39.1M revenue back in May.

Along the rapid expansion in fundamentals, the company’s stock price has run up as well. Since FQ1 earnings were released back in May the BITA share price has tripled from $12.50 to $37.50. In the current market auto dealers still have a good bit of negotiating power and are trying to keep information as asymmetric as possible to protect their high margins. But the divulgence of information coming from sites like BitAuto will arm consumers with the information they need to fairly negotiate the price of a new vehicle without overpaying dealerships, which frankly, add very little value to the modern car buying experience. 

It seems likely that franchised auto dealers are going to lose power quickly. With the spread of accurate pricing information, consumers will soon know exactly how much a car is worth and not pay a penny more. If the dealerships want to stay in business, they will need to adapt and find new ways to add value, otherwise, they look like rats on a sinking ship.