I was scratching my head, thinking of a subject to write about today. It may be worthwhile to continue writing about down-and-out stocks ready to make a comeback.
Yesterday, it was stocks hitting 52-week lows. Today, I’ll cover two stocks down for at least five consecutive days. I thought there would be more stocks in the down camp relative to the up camp. I was wrong. Not even close.
According to Barchart.com data, 17 stocks are down at least five consecutive days, compared to 200 that are up. It makes sense, considering that the S&P 500 is up 2.2% over the past five days. When the index is up, that’s usually a sign stocks are also. When the index is down over five days, that ratio likely flips.
Anyway, back to the subject at hand. I’ve to provide readers with two names in the down camp that should be able to rebound. Here are my choices.
CPI Card Group
CPI Card Group (PMTS) is down 11.30% over the past five days and 57% year-to-date. That’s not very good.
Admittedly, I haven’t spent much time studying the provider of payment technology solutions in recent months. However, I saw an article from early August by the Motley Fool’s Rich Smith discussing the Colorado company's surprisingly good Q2 2023 results from the Colorado company. Its shares jumped 21% on the news.
Smith pointed out that the tiny company’s tied at the hip to the banking industry. With most of the industry in the ratings agencies' bad books, the odds of PMTS stock maintaining an upward trajectory were low.
He was right. PMTS stock is down 42% since its 21% spike on Aug. 8. It’s trading where it did in September 2022.
The important thing I take away from CPI Card Group’s second-quarter results is that it expects sales and adjusted EBITDA growth in 2023 despite working with a banking industry that’s taken it on the chip in 2023.
In addition, it expects its free cash flow in 2023 to double. In the first six months, they were $3.73 million, considerably better than -$16.33 million a year ago. In 2022, its free cash flow was $13.47 million.
If it doubles, that’s $26.94 million in 2024. Given its current enterprise value of $470 million, it has a free cash flow yield of 5.7%. I consider anything between 4-8% to be a fair and reasonable value.
As for its enterprise value to EBITDA, it hasn’t been this low in the past decade. It’s not a slam dunk, mind you, but its products remain in demand by its banking customers.
Sonos
Sonos (SONO) is down 5.2% over the past five days and 29% year-to-date. It's flatlined over the past five years, losing nearly 5% compared to a 58% gain for the S&P 500.
Sonos remains a mystery stock. Its multi-room audio products, by all accounts, work amazingly well and sound great. Yet, its stock never seems to be able to sustain any momentum.
Since it went public in 2018, it’s had just one significant run between March 2020 (big market correction) and its all-time high of $44.72 in April 2021, 13 months later. That’s been it for momentum.
During this time, its revenue has grown from $1.14 billion in 2018 (September year-end) to $1.75 billion in 2022, a compound annual growth rate of 11.3%. Sure, it’s not 20%+, but double digits are still good for a product with serious competition.
The biggest knock against the company is its inability to make a decent profit. In 2021, Sonos’ operating margin was 9.0% on $1.72 billion in sales. Apple’s (AAPL) sales were 30.3% in fiscal 2022 (September year-end). You can’t get much better than that.
Analysts tend to like the stock. Of the seven covering it, according to Barchart.com data, rate it a Strong Buy (4.43 out of 5) with a mean target price of $20.83, 74% higher than its current share price.
Its profits can be inconsistent, but its products remain popular with audio enthusiasts because they’ve worked hard to provide an excellent streaming experience. That’s a winner in my books.
I do a lot of writing about options. I see several interesting possibilities as I look at the unusual options activity for Wednesday.
However, if you want to use options to bet on its recovery, I’d either buy the June 21/2024 $15 call or sell the Jan. 19/2024 $12.50 put.
The call’s ask price is $1.10, which is only 7.3% of its strike price, which gives a relatively low downpayment. To exercise your right to buy the 100 shares in 254 days, SONO will have to appreciate by at least 34% over the next 254 days. That might be a tall order.
However, with a delta of 0.39249, the shares need only increase by $2.80 for you to double your money by selling the call before expiry. So, the risk is relatively low.
As for the put, it has 100 days to expiration. The annualized yield based on a $12 share price is a healthy 39.4%. The downside is it’s currently in the money. If it drops below $11.20, you’re in the red on this bet. However, if it stays between $12 and $12.50, and it’s put to you, you get the shares at a reasonable price. If it expires above $12.50, you get a healthy return on your premium income.
In the five years that Sonos has been a public company, its shares have only traded in single digits once, for two months in March 2020. The odds of losing your shirt on the put are low.
Sonos is the bet I’d be more confident about of the two.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
