This Month's Losers

Author's note: The original version of this article mischaracterized True Religion CEO Jeffrey Lubell's bonus plan based on the latest proxy, which was superseded by a January filing. I regret the error.

As a dedicated stock market trash-picker, I spend a lot of time combing the latest low lists to see whether there's any junk in there that's worth more than the current price. But sometimes, stocks take big dives that don't bring them into 52-week-low turf. That's why every month, I also run a screen designed to find the latest losers, or "teh loosers," as I call them, in the Internet parlance of our times.

Why bother? Because I don't believe in the whole "don't try to catch a falling knife" rule. Yes, sometimes stocks are dropping for very good reasons, but that's not always the case. In certain sectors -- especially retail and technology -- short-term news can chop a quick 20% to 30% off a good company, taking it from fair-priced turf, where I try not to buy, to value territory, where it's "game on."

Here are some of the most interesting "loosers" of the past month, screened by amount of percentage loss in stock price, for companies of $200 million in market cap or larger.

Company

Ticker

Recent Price

1 Month ago

Loss

ViroPharma

(Nasdaq: VPHM  )

$11.69

$20.60

-43.3%

WorldSpace

(Nasdaq: WRSP  )

$7.35

$12.26

-40.0%

Novell

(Nasdaq: NOVL  )

$7.68

$9.76

-21.3%

True Religion

(Nasdaq: TRLG  )

$18.87

$23.67

-20.3%

Sadia

(NYSE: SDA  )

$26.85

$31.64

-15.1%

BrasilTelecom

(NYSE: BTM  )

$13.49

$15.58

-13.4%



Big bad Bs
It's been a tough month for biotechs and Brazil. Well, I'm being a bit loose with the term "biotech," but there were four pharmaceutical/biotech companies among the top 10 losers returned by my screen, the worst of which, alas, is a company I owned. (I'd tell you which one, but I recently traded it, and we have rules about that kind of thing.)

ViroPharma, on the other hand, dropped like a rock on news that generics might be able to horn in on its Vancocin market sooner than hoped. That story seemed unlikely to colleague Rich Duprey. Today, the stock is jumping 10% on word of a successful phase 2 study of maribavir, which is designed to "inhibit cytomegalovirus (CMV) reactivation in transplant patients." If you like cash-flow-positive drug companies trading for six times earnings and think the Food and Drug Administration isn't going to follow through on its generic threat with Vancocin, ViroPharma is definitely worth a look.

Turning to Brazil, this month there has been a growing scandal involving the government's finance minister, which seems to have spooked the market there, dropping several stocks. Notable among these is Sadia, an integrated poultry, pork, and heat-and-eat food producer with one of the best-known brands in that developing economy. It has long interested me, and is up about 30% in the 15 months since I last gave it a look-over (and didn't buy. Doh!). But, of course, it's subject not only to political gales, but also the cyclical risks of food commodities and perhaps (someday) the bird flu scare.

Investors who aren't afraid to roll up their sleeves and brave the jungles of Brazil's infamous ownership structures might be better served by taking a harder look at Brasil Telecom. It currently boasts a better than 10% dividend yield, and if the numbers I'm getting from Capital IQ are correct, that payout represents only 62% of the trailing 12 months' free cash flow. If I apply a minuscule growth rate of 3% to this firm, and an 11% required rate of return, a thumbnail discounted cash flow valuation suggests a stock trading for half its intrinsic value. I wouldn't go out on a limb and shout "buy" here, but that's more than enough to encourage a closer look.

We are the world
One of the companies that richly deserves to be in this space is WorldSpace, the purported global satellite radio play that makes Sirius and XM look downright cheap by comparison. I wish I'd had the guts to short this junk when I first recognized it as such, because since then, it's shed 63% of its value, and for good reason. Continued, major losses will not be offset by subscriber gains. The India story is ugly already, and it gets uglier when you consider that the firm doesn't yet have the ability to offer people in-car service and will need to spend a lot to get there. Strange ownership with sweetheart deals for management's cohorts (see that first link) seal the deal here. This is one loser that's going to continue hurting shareholders.

Nothing novel
Novell investors are used to disappointment, and they got it again this month as slimmer first-quarter revenues and a warning about Q2 sent the shares crashing. Although the firm has been trying to cast itself as a new and revolutionary Linux provider, the Street doesn't seem to be buying it any more than the customers are, while Red Hat soars. Why would anyone bet on a third-rate tech has-been?

Fleeing the church
True Religion
is one of those companies that the faithful have been trying to anoint as the next big thing. Certainly, 200-plus-% revenue growth and 300-ish-% earnings growth sounds pretty hot. That's why I was surprised to see this one show up on the monthly loser list. We might suspect that the fall was owed to the sin of meeting analyst expectations for this quarter's earnings, but it had begun before then. Frankly, the story alone looks interesting. There's the profit growth and now a move to retail stores and diversification out of denim -- which the Street perceives (incorrectly, in my opinion) to be riskier than other clothing trends.

But you won't find me catching religion, even at a cheaper price. True Religion has made some progress in what was originally a fishy-looking CEO compensatin packaged based on revenus, as I originally warned months ago. Since then, CEO Jeffrey Lubell, who has overseen some crashed fads in the past, has forgone the sweetheart deal that granted him 1.5% of the top line, which was better than the 3% cut he was getting before, in favor of a bonus plan based on EBIT. It looks like a more expensive plan, but I think it does a somewhat better job of aligning his interest with shareholders. But I'm still not a fan of the history of shortish restrictions on restricted stock and the very generous executive options grants, and I see a bit to worry about in the frequent, multimillion-dollar share sales Lubell (and others) are making this early in the young company's history. Those seem like the actions of people who aren't sure how long a good thing is going to last, which is why you won't find me signing up to find out after they do.

Foolish bottom line
As often happens, the most volatile sectors provide the most interesting potential buys. ViroPharma is definitely a hot potato, but if the dice roll in investors' favor, the returns there could be quick and big. Brasil Telecom is, to my mind, the most interesting candidate for further research. The great degree of pessimism about old-school telecom companies has not only depressed many foreign telecoms, but it has masked the fact that most of these companies are, in fact, players in the cutting edge as well. There's a lot to be said for companies that carry prices that discount all but the most meager future growth. And it's even better when a scandal spooks the price down even more.

If you like foreign telecoms that are priced for failure though they're delivering major cash flow, Mathew Emmert has a full stable inMotley Fool Income Investor. A free trial will let you see what it's all about. For even more overseas opportunities, take a look at our brand new International Stock Report.

XM is a Motley Fool Rule Breakers recommendation.

Seth Jayson wishes he had some Red Hat, but at the time of publication, he had no positions in any firm mentioned here. View his stock holdings and Fool profile here. Fool rules are here.


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