5 Superball Stocks
Oct 1st 2012 2:39PM
Updated Oct 1st 2012 2:40PM
When stocks fall fast and far, they sometimes set themselves up for remarkable rebounds. The following equities suffered dramatic drops over the past week. With help from the 180,000 members of Motley Fool CAPS, we'll see whether any of them have the potential to bounce back.
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:
How Far From 52-Week High?
(out of 5)
|InvenSense (NAS: INVN)||(46%)||$11.95||*****|
|Thompson Creek Metals (NYS: TC)||(70%)||$2.85||*****|
|Molycorp (NYS: MCP)||(73%)||$11.50||**|
|VIVUS (NAS: VVUS)||(43%)||$17.81||**|
|Questcor Pharmaceuticals (NAS: QCOR)||(69%)||$18.47||**|
Five super falls -- one superball
A 1.3% slump on the S&P 500 and a 1% decline in the Dow produced an outsized list of losers on stock markets last week, as some 4,300 separate companies exited the week poorer than they went into it. More than 240 stocks were decimated last week, suffering 10% (or bigger) declines in stock price -- including all five of the companies named above. So what went wrong?
Bad news stretched the length and breadth of the market last week, from popular, five-starred CAPS stocks to the lowly two-stars, ranging from go-go biotechs all the way down to the humdrum mining stocks. At the bottom of this week's list, Questcor got cored after Aetna announced it would sharply curtail coverage of patients prescribed the company's Acthar gel. (And multiple shareholder lawsuits against Questcor haven't helped matters any). As for VIVUS, it faces rejection on another front entirely, as the company warns that the European Medicines Agency is likely to cite safety concerns in denying approval of the company's Qsymia weight loss drug on the Continent.
Meanwhile in metals, shares of Molycorp continue to price in more and more risk as China relaxes export restrictions on rare earth minerals (easing supply concerns), and as Molycorp itself moves to increase production (easing supply and lower prices even more). Thompson Creek is suffering from related concerns, as a slowdown in Chinese manufacturing hurts demand for steel... and for the molybdenum that Thompson mines.
So... so much for Thompson. But what about the other five-star stock on today's list? Unlike Thompson, InvenSense operates with a light balance sheet, unhampered by debt. (To the contrary -- InvenSense boasts $120 million of cash in the bank.) Unlike Thompson, it's not tied to the vagaries of the commodities metals markets, but rather makes hi-tech micro-electro-mechanical gyroscopes for use in electronics devices. Investors sense a bargain at InvenSense, but are they right?
The bull case for InvenSense
All-Star CAPS player saunafool likes InvenSense's position in the market for "motion sensors for smartphones and tablets." Fellow All-Star charledl points out that "more and more smartphones, tablets, and game controllers are using motion sensors. This technology will probably see growth in other types of products as well."
Granted, AndreCCCP points out that "INVN did not make its way inside an iPhone 5," but not every mobile device in the world is an iProduct, and what's more, odenpaul believes there are "a lot of other devices besides cell phones" that InvenSense's sensors can fit into.
A few caveats
Personally, I'm inclined to agree with the bull thesis on this one. (It certainly worked out well the last time I picked InvenSense.) That said, there are some things that worry me. For example, if I recall correctly, when I recommended this stock as a bargain back in June, InvenSense didn't have "$120 million" in the bank, but something closer to $150 million. That's an awful lot of scratch to suddenly go missing in just four months' time.
Also worrisome is the fact that InvenSense's cash flow production has continued to weaken over the past few months, and now stands at just $33.4 million on a trailing-12-month basis -- down from $42 million. As a result, InvenSense is now generating less real free cash flow than it claims to be "earning" under GAAP accounting procedures -- and the trend is moving in the wrong direction.
Result: With InvenSense now selling for a slight premium (27 times free cash flow) to its growth rate (25%), I'm less comfortable recommending a double-down. While the stock could bounce, and has plenty of "potential," I want to see more actual execution before buying.
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The article 5 Superball Stocks originally appeared on Fool.com.Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 293 out of more than 180,000 members. The Fool has a disclosure policy. The Motley Fool owns shares of InvenSense. We 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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