Small-Cap Blues Don't Bother Gurus
Matthew Rand; data provided by Marketocracy 08.08.07, 1:00 PM ET
Since its July 19 high, the S&P; 500 has lost 7.7%. Meanwhile, the Russell 2000 small-cap index has lost 11.3%. Top investors at Marketocracy spent last week on a buying spree, scooping up small-cap shares that they thought were due for gains. Their buys outweighed their sells by 36%.
The M100's biggest buy was Birmingham, Ala.-based health care REIT Medical Properties Trust (nyse: MPW - news - people ). It is down 22% this year, and the dividend yield is up to 9.6%. It trades at 15 times last year's funds from operations. Last week, the trust announced it would buy back 6% of the outstanding shares of its stock. Gurus were buying a week ago, and then more than doubled their holdings after hearing about the buyback. MPW is now their 32nd-biggest holding. The $563 million REIT will report earnings on Aug. 9.
Another big buy was Dawson Geophysical (nasdaq: DWSN - news - people ) of Midland, Texas. The company collects seismic data for oil and gas companies. Last week, the company said that fiscal third-quarter profit was up 78% over the prior year to 98 cents per share, handily beating analyst estimates of 78 cents per share. Dawson stock jumped 24% on the news, and it's gained 79% year-to-date. Even after those gains, the $497 million company trades for just 21.4 times earnings and 18.9 times forward earnings.
After a bunch of upward revisions this month, the consensus long-term annual expected earnings growth rate for the company is 25%. Gurus see oil supply problems driving more outstanding quarters for Dawson, and they loaded up, adding 143% to their holdings.
Gurus are probably feeling indigestion right now for a third buy. San Diego biotech Santarus (nasdaq: SNTS - news - people ) was their biggest new buy of the week. The company, which makes Zegerid, an acid reflux pill, beat analyst expectations for the second quarter, losing only 25 cents per share, compared with expectations of a 31 cent per share loss.
But the company also said that generic competition was tough enough that it couldn't give sales guidance anymore for 2008, a period for which it had previously predicted $200 million in sales. Ouch. The stock fell 30% on Aug. 6. Gurus who bought in last week are suffering now, but for investors who still believe in the company, it's now an even cheaper buy.
Although Santarus' lack of guidance was a grim sign, the company said it still thought it would be breaking even by the second half of 2008. Based on the trailing 12-month pretax loss of $53 million, revenue of $62 million and cost of goods sold at 22.2% of revenue, break-even revenue for that period might have been roughly $130 million. Assuming expenses don't change significantly, that might be in the neighborhood of Santarus' internal guidance, for an annualized revenue rate for the second half of 2008.
If so, that's a 35% haircut from previous guidance, which is also in the neighborhood of the stock's decline. Hard to say whether gurus would have bought after the announcement, but at three times sales, this small-cap might be worth watching.
Gurus dumped all of their shares of ABM Industries (nyse: ABM - news - people ), a San Francisco-based facility services company. The stock is up 37.7% over the past 52 weeks, but it is flat for 2007. Its price-to-earnings ratio is 10.8, but its forward price-to-earnings ratio is nearly double that, at 21.3. Gurus sold.
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Another stock they sold off was Dress Barn (nasdaq: DBRN - news - people ), the Suffern, N.Y.-based women's clothing store. The stock's been falling lately and is now down 25.7% year-to-date. Even with the stock at just 79% of the apparel industry's average valuation, gurus thought it wasn't worth holding.
In addition, they sold half of their holdings of travel Web site Travelzoo (nasdaq: TZOO - news - people ). Analysts expect earnings to shrink 22% for full-year 2007, and the stock has been falling like a rock. Down 33% this year, Travelzoo wasn't a name that the gurus were comfortable overweighting anymore.
Marketocracy.com tracks more than 60,000 online stock portfolios. Of those, the top 100 performing portfolios, the M100, are used to create a real-life mutual fund, the Masters 100 Fund (MOFQX), which is managed by founder Ken Kam. Each week, Guru Picks analyzes the buys and sells of the M100. To read Ken Kam's Best Ideas Blog, click here.
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