The Short Term Play
10 Stocks That Could Be Doubled In Value During January Rally - VRNG
December 16, 2012
2012 is about over. With less than three weeks left in 2012, the US stock market will almost certainly have another year of extraordinary run. Year to date, Nasdaq has risen an impressive 14.62% and S&P 500 has gained 12.80%.
However a number of stocks are not so fortunate. Many suffered huge loses so far this year and are now getting hit even harder with tax-loss selling.
Many of those beaten down stocks are likely to rebound substantially in January. And this is particularly true among small cap stocks. We call this phenomenon " January Effect " or " January Rally " and it occurs over most of the years.
Now is a good time to identify the right stocks which may be poised for a big January rally.
How to Play the January Rally?
We need to have a good strategy to play the January rally in order to maximize the possible returns. A good strategy should tell us
- How to select the right stocks;
- When to buy; and
- When to sell.
As the title indicated, we want to identify stocks which may give us 100%+ returns during the upcoming January rally, but at the same time we want to keep the risks low.
The stock we are looking for should meet the following criteria:
- Has to be a small cap - current market cap < 1.5 billion.
- Price has down at least 50% from year high.
- Price < $10.
- Has plenty of cash with no or very little debt.
- Has story behind its possible rally in January.
- Has good liquidity. Average daily volume > 500k. In most cases > 1 million.
- Price gain may be sustainable.
- High growth or potential high growth in 2013 and beyond.
- History - last year's January performance. History may repeat.
- Analysts' average one year price target is at least 100% higher than its current price.
When to Buy
We will buy the picks during the next three weeks and want to buy them at their strong support levels.
When to Sell
- We may sell it if a stock gained over 100% during January
- We will put a trailing stop at 10% below its high once a stock gained over 30%.
- If neither happens, sell it at the end of January.
Now is our first pick
Pick No. 1 - VRNG
We select this stock as our number one pick because this stock is currently one of the most debated stocks among many investors and it also meets most of our selection criteria.
- Market Cap : $247.1 million ( pass ).
- Share Count : 80 million.
- Cash : $50 million ( pass ).
- Debt : $0 ( pass ).
- Year high/low : $5.76/$0.68.
- Current stock price : $3.06 (down -46.87% from its year high, fail , but not far away)
- Average daily volume : 7.97 million ( pass ).
- Its strong support level : $2.8 - $3.1 ( pass ). See chart below
- Has a story behind its possible rally in January - yes. See below for explanation
Stock closed at $3.06 as of this writing. This stock has been in $2.81 - $4.25 trading range most of times since April and now is at the bottom of its trading range.
Stock has been quite weak. It lost about 27% in last 10 trading sessions due to the market's increasing confusions on the jury's verdict for the case.
In jury's verdict, Vringo was awarded a total of $30.5 million for the past damage and a 3.5% running royalty.
The $30.5 million past damage includes $15.8 million from Google and $14.7 million from other four defendants (AOL, GCI, IAC and Target).
If $15.8 million is used as a reference for future damage calculation, the company may get roughly $15.8 million per year or $63.2 million total for the next four years from Google. The total award VRNG will get may be at around $94 million.
Vringo is currently valued at a 1.7 x multiple of its expected cash level - $50 million cash plus $94 million possible damage payment.
What could be the story on the company next month?
First the main event - Judgment day may be in early January. We will hear Judge's final judgment. The stock price will be greatly affected by how much Judge will award to Vringo.
If Judge corrects the "math error" made by jury's calculation on the past damage and bring the total past damage to $158 million from Google instead of $15.8 million, Vringo's stock price will immediately run up roughly by $1.25.
If Judge keeps the past damage amount unchanged but awards a higher future damage payment, stock will go higher as well. For each additional $100 million award, we will add $0.80 to its current stock price.
That is, if the total future award is $300 million more than market expectation, Vringo's stock price should go up around $2.4. With $400 million more, we should see a double on Vringo's stock price.
Stock will be traded within its current trading range before Judge makes his final judgment.
Our view : We believe that Judge will use 3.5% x 20.9% formula to calculate Vringo's future damage payment.
The second event which may become the company's next main event: The progress on its patent infringement lawsuit filed against ZTE Corp in UK and Germany. If the lawsuit has significant development in favor of Vringo during January, stock will also be boosted.
Risk : Stock may try to touch $2.81, the low of its 8 month trading range in coming days. The maximum pain will be $2.50. That is, we may see 20% down risk.
Reward : The stock price could be doubled if Judge's final judgment is in favor of Vringo. That is, 100% up potential.
That is, 20% down risk against 100% possible reward.
Our buy price : We will use $3.06, its today's close price, as our buy price.