Get Ready for the Bounce
Jul 16th 2012 1:32PM
Updated Jul 16th 2012 1:36PM
"Don't catch a falling knife," as the old saw commands. (Pardon my mixing a cutlery metaphor.) The idea of buying a former superstar stock at a discount price certainly has its attractions, but you've got to make sure you catch the haft -- not the blade. That's where Motley Fool CAPS comes in.
It's been a while, but thanks to last week's sell-off, we once again have a chance to stand beneath Mr. Market's silverware drawer in hopes of snagging a bargain. Let's meet today's contenders:
CAPS Rating (out of 5)
|Thompson Creek Metals (NYS: TC)||$10.23||$2.84||*****|
|SUPERVALU (NYS: SVU)||$8.93||$2.32||****|
|Hewlett-Packard (NYS: HPQ)||$36.94||$18.98||***|
|Green Mountain Coffee Roasters (NAS: GMCR)||$115.98||$19.70||**|
The week in weak stocks
After sliding for four long days, some good news from America's big banks helped salvage the week for the Dow Jones Industrial Average Friday, which ended much as it began, at 12,777. Not everyone enjoyed the big bounce, however. Indeed, each of the four stocks named above traded down to a new 52-week low. But why?
Beginning at the bottom, there's little mystery to Green Mountain's declines. Down 4% on Monday, then 7% more on Tuesday, the stock suffered smaller slips later in the week, before plunging another 7% Friday after analysts at Stifel Nicolaus slashed earnings targets. According to the analysts, Green Mountain's on track to earn as little as $1.64 per share next year, barely half what investors are counting on.
Simultaneously, an earnings warning from printer maker Lexmark erased a (small) rally that had been brewing at Hewlett-Packard. The common denominator here: Hewlett also makes printers and, in fact, depends on printer and ink sales for about 28% of its annual profits. So bad news for Lexmark is probably not great news for Hewlett.
"SUPERVALU?" Apparently not. The supermarket got crushed Wednesday, after confirming that cutthroat competition in the grocery industry will force it to eliminate its dividend and make other drastic (actually, the word they used was "strategic") moves to try and salvage the business. Promises notwithstanding, investors aren't waiting around to see how this story ends. After falling 50% Wednesday, the stock continued to slide all the way until markets mercifully closed for the weekend.
Molybdenum miner Thompson Creek confirmed last week that it will release Q2 earnings on Aug. 9. Instead of waiting for the news to come out, investors sold Thompson down to a new 52-week low. Was that the right call?
The bull case for Thompson Creek Metals
CAPS member XanderHe thinks not: "TC's operating costs have been high due to recent investment in a new mine and due to weak commodity prices. Once the new mine gets up and running, we can expect earnings to increase."
Meanwhile, ace CAPS investor Chemdawg points out that Thompson is "selling for less than 2.5 x the cash in the bank and 1/3 of book value... estimates for the next FY indicate a P/E of less than 6..any way that you slice it, this is just about as cheap as you can imagine this will go."
Indeed, if you ask CAPS member Imhilion, the company's actually selling for "below liquidation value." With share prices this low, how could an investor go wrong buying Thompson Creek?
At three times trailing earnings, and six times forward earnings, there's no doubt about it: On the surface, Thompson Creek looks cheap. But it just might be cheap for a reason. For one thing, while technically "profitable," as GAAP accounts for such things, Thompson isn't generating any actual cash from its business. To the contrary, despite "earning" $292 million last year, Thompson's capital investments left the company free cash flow negative to the tune of nearly $500 million.
Partly as a result of this inability to generate cash, the company's also bearing a heaping helping of debt -- $210 million net of cash at last report, on a market cap of less than $485 million. This debt load, combined with Thompson's continued negative free cash flow, persuaded S&P to put the company on "negative" watch for a credit downgrade last week.
A better idea
Fortunately, investors interested in Thompson Creek and its molybdenum operations do have other options to consider. For example, rival miner Freeport-McMoRan (NYS: FCX) is the biggest molybdenum miner on the planet, in addition to being a big producer of both copper and gold. It's not as cheap as Thompson from one perspective -- selling for a trailing P/E of 8.3. On the other hand, Freeport's forward P/E of 6.7 is comparable to Thompson's, and Freeport boasts additional advantages: a less leveraged balance sheet and loads of free cash flow. Perhaps best of all, Freeport pays shareholders a whopping 3.8% annual dividend. (Thompson's dividend yield: zero-point-nothing).
In short, Freeport may not have fallen as far as Thompson, but it may bounce back higher regardless.
Mining stocks aside, what other kinds of companies are poised to profit from a resurgence in American manufacturing? Find out in our new report "3 Stocks To Own For The New Industrial Revolution aka The Future is Made in America."
The article Get Ready for the Bounce originally appeared on Fool.com.Fool contributor Rich Smith owns shares of Freeport-McMoRan Copper & Gold. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 338 out of more than 180,000 members. The Fool has a disclosure policy.The Motley Fool owns shares of Freeport-McMoRan Copper & Gold, SUPERVALU, and Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended buying calls on SUPERVALU. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters.Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
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