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Stocks to Lead the Market in 2011 - 37011 views
Market leaders are stocks that produce outsized returns for investors savvy enough to get in them and enjoy the ride higher. We’ve seen this demonstrated in spades all year. Just take a look at some of the market leaders that have absolutely gone wild in 2010. Netflix (NFLX), for example, has risen about 230%, shocking the shorts and the naysayers. Priceline.com (PCLN) has soared closed to 90%, F5 Networks (FFIV) has traded up more than 150%, and Baidu.com (BIDU) has returned about 140%.
I am sure you’ve heard plenty along the way about how these stocks are overvalued and couldn't possibly go any higher. To the contrary, all of these names -- along with many other leaders -- have continued to trend higher. This is why investing solely on valuation is such a dangerous game. Just think: If you had sold Netflix because the stock was priced for perfection, that strategy would have had you selling the stock at under $100 a share, before it went up another 100%.
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Market players need to understand that valuation is a game of perception. Nobody really knows what new markets a company might try to enter or if it will succeed above and beyond what Wall Street expects. Wall Street provides us with expectations and projections, but at the end of the day, there are always unknowns you can't anticipate. Take, for example, Apple (AAPL). Could you have predicted 10 years ago that Apple would go from personal computers to the iPod to the iPhone and now to the iPad?
Good companies reinvent themselves and find new ways to grow, thereby growing their earnings and revenue -- and earning a higher valuation on Wall Street. They take advantage of markets that are being ignored or lack quality competition by introducing new products and services.
In my opinion, the only time a stock becomes overvalued is when the company stops growing or entering new growth markets. Once that happens, then all of the smart money will come out of the stock, and the story will be over.
With this in mind, let’s take a look at a few market leaders that could continue to produce outsized returns in 2011.
One market leader that I think is going to continue to soar higher in 2011 is Riverbed Technology (RVBD), which provides solutions to the fundamental problems of wide-area distributed computing in the U.S. and internationally. Riverbed is a sometimes complicated to understand yet sophisticated play on Internet networking infrastructure, smartphone growth and cloud computing. Riverbed specializes in helping companies boost their IT performance for networks, applications and storage. The company provides one of the only wide-area networks (WANs) optimization software solutions that allows customers to increase their speeds on WANs and also speeds up data access into cloud applications.
Riverbed's 2010 stock performance has been magnificent, with shares rising more than 200%.
What’s really exciting about Riverbed is that the company is positioned to benefit big from the booming growth in smartphones and smartphone apps. As the end demand for smartphones and tablet computers grows, cable and telecom companies such as AT&T (T) and Sprint Nextel (S) need to add optimization and speed to their networks. These companies can’t sit back and let their networks get bogged down as more consumers jump in on the smartphone trend. This is where Riverbed comes in. The company claims that its Steelhead Mobile Internet application increases network speed and application performance by up to 100 times. That’s the kind of performance that network owners can’t afford to miss.
Recently, a Barclays analyst said that Riverbed is continuing to gain share in a healthy WAN optimization market where demand remains robust. Barclays raised its price target to $50 a share from $40 and maintained its overweight rating.
If you like Riverbed, and if you really like the idea of playing market leaders that are involved in the cloud computing and smartphone trend, then I would also suggest taking a look at F5 Networks, Acme Packet (APKT), Akamai Technologies (AKAM) and Citrix Systems (CTXS). Each is in some way involved in the cloud computing and smartphone boom -- and even better, each has been a market leaders in 2010. I expect them to continue to lead and produce even bigger returns in 2011.
Another market leader investors should take a fresh look at is satellite radio content provider Sirius XM Radio (SIRI). I know what you’re thinking. How the heck is Sirius a market leader when it’s trading at under $5 a share? But shares of Sirius are up more than 160% in 2010, which puts the stock among some of the top performers on the year. I think those gains are set to continue into 2011 due to three major catalysts.
The first catalyst is the major deal the company just closed with Howard Stern that will keep him under contract with the wireless content provider for at least five more years, until Dec. 31, 2015. What’s so great about this deal is that Stern’s content will be available for the first time ever on mobile devices. This is absolutely huge because it will be a major driver for new customers to test out the company’s product on their Apple iPhones, Google (GOOG) Android phones and Research In Motion (RIMM) Blackbery phones.
This is where the second catalyst comes into play: explosive growth due to the booming trend toward mobile devices. Sirius isn’t just about music; it’s also about sports, with its NFL and NBA contracts. The company just signed a five-year extension of its deal with the NFL to air all the games. This NFL deal also includes play-by-play online streaming of all games in 2011. Sirius clearly sees the huge potential in moving its best content to the Internet, where consumers will gain access through mobile devices. Plus, the company has talk radio content that stretches much farther than just Howard Stern, with such popular personalities as Jim Cramer, Bill O’Reilly and Anderson Copper. These are all content segments that work perfectly with the Internet tsunami.
The final catalyst that will propel this stock much higher is the pickup in auto sales. Edmunds.com just announced that it expects to see about 1.1 million new auto sales in December, which is the highest level of the entire year. If this trend continues into next year, Sirius should benefit big since the company’s product already comes pre-installed in most new cars. Sirius is also moving toward installing its satellite radio hardware in pre-owned certified cars.
One more market leader that investors should take a hard look at is Entropic Communications (ENTR), a semiconductor firm that designs, develops and markets systems solutions to enable connected home entertainment. Basically, this company makes chips and circuits that sync cable set-top boxes, high-speed broadband routers, DVRs and satellite outdoor units. The company’s technology is used mostly for multi-room DVRs, which stream high-definition signals recorded on the DVR from the main TV to any TV in a household. Not only does Entropic's technology stream high-definition video, but it’s also used for multimedia content such as movies, music, games and photos. Some of the company's clients include Verizon Communications (VZ), Time Warner (TWX), Comcast (CMSCA) and DirecTV (DTV). This stock has been one of the biggest winners of 2010, with shares up over 270%.
Where the real growth could be for Entropic is with media center PCs and home-networked gaming devices, both of which are attempting to take over the digital entertainment content game. In a fact sheet on Entropic’s Web site, the company lists a number of potential applications for their solutions, including digital TVs, gaming consoles, media servers, home media gateways and networked attached storage devices. If the company can break into these markets, or even get in on the new trend for Internet TV services Google TV and Apple TV, then the growth could really start to kick in. The market currently views the Internet TV services as a threat to Entropic, but we have yet to see if the firm can go with this trend and introduce some product offerings. Let’s also not forget about 3-D TV, which would be another high-growth market that Entropic could attack with new products.
The company has already been growing like gangbusters, with quarterly revenue growth coming in at 98%. Plus, Entropic has a solid balance sheet with $53 million in cash and zero debt, and it trades at a reasonable 15 times forward earnings.
It’s also worth noting that the bears are betting against this company in a big way. The current short interest on Entropic as a percentage of the float as of Nov. 30 is a very large is 24.1%. If the bears are wrong in 2011 like they were in 2010, then ENTR is still early into its big uptrend.
Recently, Paul Tudor Jones at Tudor Investment initiated a position in Entropic. The stock was one on Jake Lynch's list of 10 of the best small-caps of 2010 and made it onto Fortune's list of the 10 best stocks for 2011.
-- Written by Roberto Pedone in Winderemere, Fla.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.