Diodes Inc: Zacks’ Bear of the Day Play

Down cycles during times of weak demand makes it difficult for a company to manage any excess capacity, and it tends to negatively impact margins for several quarters at a time.  Further, the company is then left waiting for improvements in the macro environment to enable them to rebound from the down cycle.  This is the situation that Diodes Incorporated (DIOD) is currently facing, who is also the Zacks Bear of the Day.

This Zacks Rank #5 (Strong Sell) is a leading manufacturer and supplier of high-quality discrete and analog semiconductor products, primarily to the communications, computing, industrial, consumer electronics and automotive markets. The Company’s corporate sales, marketing, engineering and logistics headquarters is located in Southern California, with two manufacturing facilities in Shanghai, China, a wafer fabrication plant in Kansas City, Missouri, engineering, sales, warehouse and logistics offices in Taipei, Taiwan and Hong Kong, and sales and support offices throughout the world.

In their most recent quarter, Diodes saw revenues decline -10.6% YoY, gross profits fell -17.5% YoY, and GAAP net income plummeted -85.6% YoY.  Further, gross profit margins fell from 32% to 29.5% YoY.  Also, management guided Q4 revenues about $10-12 million below current expectations of $200 million.

Looking forward Dr. Keh-Shew Lu, President and CEO, stated, “We currently expect this weak environment and the distributor inventory adjustments to extend into the fourth quarter so we have taken additional measures to carefully manage expenses, including reductions in travel and vendor expenses as well as a freeze on new hires.”

As you can see in the graph below, Diodes has been underperforming the S&P 500 for the past six months.

Decreasing Estimates

Due to the negative outlook estimates for Q4 15, FY 15, Q1 16, and FY 16 have all collapsed; Q4 15 fell from $0.31 to $0.04, FY 15 dropped from $1.20 to $0.76, Q1 16 slipped from $0.31 to $0.05, and FY 16 crashed from $1.52 to $.87.

Bottom Line

As management shifts their product mix lower they are attempting to maintain high utilization rates to improve margins, while they await better economic conditions to climb out of their current down cycle.  Unfortunately, this process is putting significant pressure on margins and overall revenues.  This pressure is expected to last through the fourth quarter and into the beginning of 2016.

If you are inclined to invest in the Electronic Component/Semiconductor segment, you would be best served to look into Ceva Inc (CEVA – Snapshot Report), Integrated Device Technology (IDTI – Snapshot Report), or Mellanox Technologies (MLNX – Snapshot Report), all of which carry a Zacks Rank #1 (Strong Buy).

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NeoPhotonics: Zacks’Bull of the Day Play

There are a few companies that specialize in high-speed communication networks, but there is one that is best positioned to take advantage of the demand for these networks worldwide.  This company most recently destroyed the Zacks Consensus Earnings and Revenue expectations, and pointed to increased activity in the next few quarters.  Further, this company has produced 5 consecutive quarters of pro forma profitability.  Due to these strong data points, Neophotonics Corp (NPTN – Snapshot Report) is the Zacks Bull of the Day.

This Zacks Rank #1 (Strong Buy) is engaged in the design and manufacture of photonic integrated circuit, or PIC, based modules and subsystems for bandwidth-intensive, high-speed communications networks. Products offered by the Company includes high-speed products that enable data transmission at 10Gbps, 40Gbps and 100Gbps, agility products such as ROADMs that dynamically allocate bandwidth to adjust for volatile traffic patterns, and access products that provide high-bandwidth connections to more devices and people over fixed and wireless networks.

According to Tim Jenks, Chairman and CEO, “We are pleased to report our fourth straight quarter of GAAP profitability and year over year revenue and margin expansion, which resulted in our generating $43 million of Adjusted EBITDA over the last four quarters. We are excited about the renewed momentum we are seeing in the 100G market and the progress we are making with our strategy of increasing our content per 100G port and extending our products to 400G and beyond.”

In their most recent quarter, revenues improved +2.4% YoY, gross margins rose +15.5% YoY, non-GAAP gross margins advanced +12.5%, and net income improved from -$1.9 million in Q314 to +$1.4 million in Q315.  Further, the company has a solid balance sheet with cash and cash equivalents valued at $103.6 million.

Going into the fourth quarter 2015, management expects revenues in a range of $82 million to $86 million, above the previous consensus of $80.5 million.  Also, the company sees non-GAAP gross margins in the range of 30%-40%.

As you can see from the graph below, Neophotonics has been significantly outperforming the S&P 500 for over the past six months.

Increasing Estimates

Due to their impressive Q3 earnings numbers and the expectation of improved orders for their 100G at China Mobile for Q4 and beyond, estimates for Q4 15, Q1 16, FY 15, and FY 16 have all increased.  Q4 15 rose from $0.03 to $0.07, FY 15 advanced from $0.22 to $0.33, Q1 16 improved from $0.02 to $0.03, and FY 16 jumped from $0.39 to $0.44.

Bottom Line

After a slowdown in China for their 100G in the previous quarter, management was able to turn the network around and show improving revenues, margins, and growing order activity in the most recent quarter.  Due to management’s guidance, sales are improving in China for Q4 and into 2016, which has set the company up for a positive 2015, and 2016.

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Gap: Zacks’ Bear of the Day Play

Gap Inc. (GPS – Analyst Report) continues to struggle to connect with consumers in several of its brands. Earnings are expected to contract this year for this Zacks Rank #5 (Strong Sell).

Gap is a global specialty retailer with more than 3300 company-operated stores and 400 franchised stores in 90 countries along with e-commerce sites. It operates the well-known brands Gap, Banana Republic, Old Navy, Athleta and Intermix brands.

Another Earnings Meet But Sales Disappoint

On Nov 19, Gap reported its third quarter fiscal 2015 results and met the Zacks Consensus.

Net sales fell 3% to $3.86 billion from $3.97 billion a year ago.

But the real story was really in the comparable store sales results as they fell 2% versus a 2% decline the year before.

Old Navy was the only positive out of the major brands. It saw comparable store sales rise 4%. Gap Global saw a decline of 4% and Banana Republic continued to struggle as it fell 12%.

The company still doesn’t bust out the numbers for Athleta, it’s very successful athletic brand. That leaves me to guess at how that brand is doing.

It goes up against some stiff competition in lululemon, North Face, Columbia Sportswear and others but Gap has been aggressive with its roll out campaign.

Gap is expecting to have 120 Athleta stores by the end of the fiscal year in the United States. It recently rolled out the AthletaCard which will join the Gap’s other credit cards in that you can use it any of its stores and accumulate points.

It also is expanding its Old Navy brand with 7 company-owned brands now open in Mexico with the expectation of 9 stores by the end of the fiscal year.

Earnings Estimates Slashed

Gap called the third quarter “challenging” but the analysts don’t seem to believe that they will turn it around this holiday season.

Sixteen estimates were cut for fiscal 2015 in the last week. The Zacks Consensus Estimate has fallen to $2.40 from $2.61 just 30 days ago.

That is an earnings decline of 12.9% from fiscal 2014 when the company earned $2.76 per share.

Next year isn’t supposed to see much of a rebound. Earnings are expected to rise, but just 4.4%.

Shares at Multi-Year Lows

Gap shares have been sliding for awhile but the earnings report pushed them to new 3-year lows.

They’re now cheap, as well, with a forward P/E of just 11.5.

But it still appears that some of its brands may continue to struggle.

Not all retailers are struggling right now though.

American Eagle Outfitters (AEO – Analyst Report) saw its comparable store sales rise 9% in the third quarter despite the challenging retail environment. It also raised third quarter earnings guidance. It’s a Zacks Rank #1 (Strong Buy).

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Superior Industries: Zacks’ Bull of the Day Play

Superior Industries International, Inc. (SUP – Analyst Report) is cashing in on the hot auto market. This Zacks Rank #1 (Strong Buy) is expected to grow earnings by the double digits both this year and in 2016.

Superior is the largest manufacturer of aluminum wheels for passenger cars and light-duty vehicles in North America.

It operates plants in the U.S. and Mexico and supplies aluminum wheels to the original equipment market. Its largest customers include most of the big auto makers such as BMW, FCA, Ford, General Motors, Mazda, Nissan, Subaru, Tesla, Toyota and Volkswagen.

A Solid Third Quarter

On Nov 3, Superior reported its third quarter results and met on the Zacks Consensus Estimate which was calling for 19 cents. It had beaten the prior three quarters so it has either beat or met over the last 4 quarters.

Unit shipments jumped 6% to 2.8 million year over year.

It has closed older manufacturing facilities and opened a new, more efficient factory in Mexico, which is expected to ramp up production in the fourth quarter.

Raised 2015 Value Added Sales

The company adjusted its full year guidance by raising its full year value added sales and lowering its net sales to reflect lower than expected aluminum prices.

The analysts liked what they heard as 2 estimates were raised for both 2015 and 2016 since the earnings report.

2015 earnings are now expected to jump 43.1% compared to a year ago.

But they don’t expect the good times to end this year. 2016 is forecasted to bring another 17.2% earnings growth.

Shares In Narrow Trading Range

Shares have bounced off the recent lows but are still trading in a narrow trading range they’ve been in for the last 2 years.

But they’re not that cheap. They trade with a forward P/E of 20.6.

Yet Superior is still returning value to the shareholders.

It pays a hefty dividend, currently yielding 3.8%.

It’s also repurchasing shares as part of its $30 million buyback program. Year-to-date it has repurchased $16.2 million.

For investors looking for a way to play the hot auto market, without buying one of the auto makers, Superior is one to keep on its short list.

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Famous Daves: Zacks’ Bear of the Day Play

Now don’t get this twisted, I love BBQ as much as the next guy. And with a ticker like this, it’s tough to root against this company. But I’m really not in the business of cheerleading, I’m in the money making business. And if you’re business isn’t bringing home the bacon I don’t care what you do or what your ticker is, I’m not going to be impressed.

Today’s “Bear of the Day” is Zacks Rank #5 (Strong Sell) Famous Dave’s (DAVE – Snapshot Report). Famous Dave’s owns, operates and franchises barbeque restaurants and blues clubs. It’s not the food that’s got me bearish on DAVE. I’ve been to several locations and thoroughly enjoyed my meal each and every time I’ve ever gone.

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But it’s the analysts that aren’t licking their fingers while they’re at the table. Two analysts have dropped their earnings estimates for the current quarter and current year. The bearish attitude has sent our Zacks Consensus Estimate for the current quarter from a 4 cent gain to an 8 cent loss. The current year numbers look even worse, with consensus plummeting from 40 cents down to 19 cents.

It should come as no surprise then that shares of DAVE have come under some serious pressure over the last year. After trading as high as $34.72 in February 2015, shares took a tumble. A last ditch effort to hang onto the $30s in late April was met with a violent downturn that has yet to relent. Currently shares are dragging down close to yet another 52-week low, trading near $8.50.

The restaurant industry still ranks in the Top 29% of the 265 industries we follow with our Zacks Industry Rank. Investors looking for other stocks within the same industry that are in the good graces of our rankings should look at BJ’s Restaurant (BJRI – Analyst Report) and Bojangles (BOJA – Snapshot Report). Both are Zacks Rank #1 (Strong Buy) stocks.

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Cooper Standard: Zacks’ Bull of the Day Play

It’s hard to argue with the Zacks Rank and Style Scores. Sure I’ve heard people say it lags the market and can take too long to turn around but overall, you can’t argue the numbers. Annualized 26% return since 1988. Where else can you find that? So when I’m looking for a “Bull of the Day” I don’t try to come out here and reinvent the wheel. Why not stick to what works? And what works is looking for a Zacks Rank #1 (Strong Buy) that has a Momentum Style Score of “A.”

Cooper-Standard (CPS – Snapshot Report) is a global manufacturer and supplier of systems and components for the automotive industry. Its products include fluid transfer, fuel and brake delivery systems, anti-vibration systems, body sealing and body trim and other automotive components. Its products are used primarily in passenger vehicles and light trucks by global automotive original equipment manufacturers (OEMs) and in replacement markets.

Cooper-Standard operates four main segments: North America, Europe, South America, and Asia Pacific. Cooper-Standard operates in over 20 countries globally and has more than 25,000 employees. Cooper-Standard was founded in 2004 when it was sold by Cooper Tire & Rubber Company.

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Cooper-Standard’s earnings surprise history is a big reason why it’s a Zacks Rank #1 (Strong Buy). The company has beat earnings estimates each of the last four quarters by an average of 64 cents. Last quarter’s beat saw EPS come in at $2.21 versus our Zacks Consensus Estimate calling for $1.41.

The bullish history is a big reason why shares have gone on such a big run since September. After bottoming out just shy of the August low near $54, shares crossed over the 20-day moving average and began an uptrend that stalled at the 52-week high in late October. Following the great earnings report, shares leapfrogged that level and have since pushed all the way to $73. Volumes have seen a bit of an uptick as well over the last few weeks. Support to the downside remains below $72. Further down than that, the next significant level is the previous congestion near $65.

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Nordstrom: Zacks’ Bear of the Day Play

Many investors had high hopes for the retail sector heading into this holiday season. Gas prices are extremely low and the job market is much improved, leaving more discretionary income in consumers’ pockets.

However, not all retailers have benefited from this trend, as it instead appears that several in the department store/apparel segment have been hit hard. Take for example Nordstrom (JWN – Analyst Report) which crumbled more than 20% following its recent earnings report.

Recent Earnings

JWN reported lackluster EPS of just 57 cents per share which was a huge miss from the analyst expectation of 71 cents per share. Additionally, gross profit margins fell and SG&A costs rose, while guidance also took a hit too.

In fact, the company now expects net sales to increase just 7.5%-8.0% (compared to earlier predictions of 8.5%-9.5% growth), while EPS guidance was severely cut as well. The EPS projection actually moved down to $3.32-3.42, a huge drop from previous guidance of $3.85-$3.95.

Unsurprisingly given these awful numbers, analysts have been racing to slash their estimates for JWN stock. Not a single estimate has gone higher in the past two months for JWN in any of the time frames we study, and current EPS growth projections for the year are now deep in contraction territory with an 8.4% decline projected.

And with Nordstrom inventory rising heading into the holiday season, many are worried about big discounts hitting merchandise in the weeks ahead too. Overall, it looks like a stock to avoid to close out 2015 and that’s why we have it as a Zacks Rank #5 (Strong Sell) right now.

Other Choices

Given the solid trading from some retailers lately and the continued dominance of Amazon (AMZN), you have to consider other retailers right now for exposure in this sector. After all, there are still many solid points for the economy but some haven’t been able to exploit these positives thanks to company specific issues.

One stock that might be a better choice this holiday season is American Eagle Outfitters (AEO – Analyst Report). This security reports in a few weeks and it has been seeing strong positive earnings estimate revisions as of late to go on top of an already robust earnings report history. Plus the stock is looking for EPS growth of nearly 54% this quarter and it is a Zacks Rank #1 (Strong Buy), making it a compelling selection for investors heading into the crucial holiday season, and a much better choice than JWN for now.

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Southwest Airlines: Zacks’Bull of the Day Play

2015 has been a very interesting year for airline stocks like Southwest Airlines (LUV – Analyst Report). Extremely low oil prices made investors bullish about the space for much of the year, but then concerns over the economy and competition sank the space for much of the summer.

Overall, LUV is up about 11% YTD which is thoroughly crushing the S&P 500 over the same time frame, though most of this is thanks to the sudden surge over the past three months. LUV is actually up about 25% in just that time frame, pretty much saving the year for the stock.

But with such a big surge as of late, investors have to be asking, can this trend continue into 2016? If we look to recent earnings estimate revisions as a guide, then the answer to the question above may be ‘yes’.

Recent Earnings Estimates

With oil prices staying in a trend below $50 (and just breaching the $40 mark) this is fantastic news for the airline industry. Fuel is obviously one of their main input costs and less spending here leaves more for the bottom line.

And in Southwest Airlines’ case, these savings can be used to fuel an aggressive expansion campaign including the company’s first foray into international markets. From their new hub at Houston’s Hobby Airport—in addition to flights at several of the airline’s other major focus cities—LUV has begun to fly people across the Caribbean and beyond including to popular resort destinations like Cancun and Aruba, and more business-focused cities like Mexico City too. New routes means more profits which is more reason to be bullish on LUV right now.

These factors have given analysts no choice but to raise their earnings estimates for LUV stock pushing the consensus estimate higher for both the current year and next year time frame. In fact, for both of those time periods, not a single estimate was lowered suggesting that analysts have complete confidence in LUV to grow earnings.

And before you worry about LUV and its ability to beat lofty earnings expectations, consider that over the past four quarters it has beaten estimates each time including an average of 3.6% over the past four quarters. In fact, LUV hasn’t missed expectations since July of 2013, making it a compelling choice for earnings-focused investors.

Bottom Line

Thanks to the factors above, LUV has earned itself a Zacks Rank #1 (Strong Buy) and we are looking for a run of outperformance heading into 2016 as well. The company is expected to see incredible EPS growth for the year and its forward PE is still an absurdly low 13.2.

If that wasn’t enough, consider that LUV’s airline industry currently has an industry rank in the top 35% too, so there are plenty of tailwinds at the company’s back too. So, for an impressive choice heading into 2016 definitely consider Southwest Airlines as it is well-positioned for continued and profitable growth heading into the New Year.

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Author is long LUV.

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Bunge: Zacks’ Bear of the Day Play

Bunge Limited (BG) is a leading agribusiness and food company with integrated operations in about 40 countries. It is a global leader in oilseed processing, and grain & oilseed marketing. The company has four business segments 1) Agribusiness, 2) Sugar & Bioenergy 3) Food & Ingredients and 4) Fertilizers.

The company IPO’d in 2001 and has expanded though many significant acquisitions since then.

Disappointing Third Quarter Results

Adjusted EBIT for the quarter was $367 million, up from $316 million in the prior-year quarter, driven mainly by Agribusiness segment’s performance. However, agribusiness’ strength could not offset the weakness seen in other segments. Revenue for the quarter was $10.8 billion, down from $13.7 billion, a year ago.

Adjusted earnings were $1.24 per share, about 21% short of the Zacks Consensus Estimate of $1.57 per share. The company has missed in three out of last four quarters, with an average quarterly surprise of negative 24%

Falling Estimates

After poor results, analysts have revised their estimates for the company sharply downwards. Zacks Consensus Estimates for the current and the next fiscal year are now $5.15 per share and $6.23 per share respectively, down from $5.74 per share and $6.75 per share, 7 days ago.

The Bottom Line
As the company generates most of its revenues from its Agribusiness segment, it remains vulnerable to weak agricultural commodity prices, decline in global demand and foreign exchange volatility. Zacks Industry Rank for Agricultural Products Industry is currently 248 out of 265 (bottom 6%) . There is no Zacks Rank # 1 (Strong Buy) or # 2 (Buy) stock in this industry. It is safer for investors to avoid this industry for the time being.

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Cincinnati Financial: Zacks’Bull of the Day Play

This S&P 500 dividend aristocrat—with a juicy dividend yield of more than 3%–has been increasing its dividend for the last 54 years in a row—a record matched by only eight US public companies.

Further, this Zacks Rank # 1 (Strong Buy) stock has been benefitting from an above industry average premium growth, expansion in underwriting margins and excellent performance of its diversified investment portfolio.

About the Company

Headquartered in Fairfield, OH, Cincinnati Financial (CINF – Analyst Report) is one of top 25 property and casualty insurers in the US. Formed in 1968 the company operates through the Cincinnati Insurance Company, which itself has four insurance subsidiaries, and through two financial services subsidiaries.

The company, which was started by independent insurance agents, has an agent-centered business model. They market a broad range of property casualty insurance products in 39 states.

The company enjoys excellent ratings from the top rating agencies–A.M. Best, S&P and Fitch rating of ‘A+’ and Moody’s rating of ‘A1’.

Impressive Third Quarter Results

The company reported third-quarter 2015 results on October 27. Operating income of $1.04 per share was way ahead of the Zacks Consensus Estimate of $0.69. Strong results were driven by property casualty underwriting profits and increase in investment income, partly offset by higher catastrophe losses.

Total operating revenue came in at $1.28 billion, up 4.9% year over year.  Combined ratio increased 320 bps.

Rising Estimates

After strong results, analysts have revised the earnings estimates upwards. Zacks Consensus Estimates for the current and the next year are now $3.35 per share and $2.60 per share respectively, up significantly from $2.90 and $2.40, 30 days ago.

The company has beaten the Zacks Consensus Estimates in three out of last four quarters, with an average positive surprise of 42%. In fact looking at the longer-term picture, the company has missed only in 3 out of last 20 quarters.

Positive Outlook for the Industry

“Property & Casualty Insurance” industry is currently ranked 64 out of 265 Zacks industries. Per Zacks Industry Outlook “mild catastrophe losses and continued influx of capital are expected to keep most lines of Property & Casualty insurance favorable for buyers. Also, the ongoing reserve development will continue to support insurers’ financials. Moreover, increasing demand from the economically recuperating American households should eventually place insurers in a favorable pricing cycle.”

The Bottom Line

CINF is a Zacks Rank#1 (Strong Buy) stock. Further a favorable Zacks Industry Rank also indicates the likelihood of outperformance in the short-to-medium term.

With a dividend yield of 3.01% and excellent growth potential, I believe that this stock will be a nice addition to any portfolio.

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