I am always looking for a good deal, whether that means buying an extra box of Coco Puffs when they're on sale or pouncing on undervalued stocks. The idea that anybody would sell a stock for less than its worth may seem silly, but legendary value investor Ben Graham tells us, by way of allegory, how we can look out for these situations.
In The Intelligent Investor, Graham introduces readers to a wacky guy named Mr. Market. Mr. Market's game is to pay you house calls on a daily basis to offer to sell you interests in businesses he owns or to buy from you interests in businesses you own. Sometimes Mr. Market will show up at your door very excited and offer you premium prices for your holdings, while at other times he'll be totally depressed about the future and will offer to sell you what he has for as low as pennies on the dollar.
So to find some of the stocks that Mr. Market is depressed about, I've turned once again to The Motley Fool's CAPS investor community. Each of the companies below had been given a five-star rating (the highest) by our community of investors just 30 days ago:
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30-Day Return
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One-Year Return
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Current CAPS Rating
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Resources Connection (:RECN)
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(20.3%)
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(8.4%)
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****
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Cabot (:CBT)
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(9.8%)
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(0.6%)
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*****
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Verigy (NASDAQ:VRGY)
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(9.2%)
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50.4%
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****
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Copano Energy (NASDAQ:CPNO)
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(9.2%)
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36.3%
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*****
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Xyratex (NASDAQ:XRTX)
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(9.1%)
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(0.8%)
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*****
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American Science & Engineering (NASDAQ:ASEI)
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(8.9%)
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40.4%
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*****
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Northgate Minerals (AMEX:NXG)
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(8.3%)
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(12.1%)
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****
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Data from Motley Fool CAPS as of Oct. 2.
As the table shows, these stocks are all still very well-regarded by the CAPS community, despite their underperformance over the past month. While these are not formal recommendations, they could be a great place to kick off some further research. I'll even get you started with some thoughts on Resources Connection.
So who is right?
There are really just two possibilities here: either Mr. Market hasn't been taking his meds and is selling Resources Connection on the cheap, or the CAPS community has it all wrong.
Stepping back first, though, let's take a quick look at what Resources Connection does, since it's not exactly a household name. Resources was founded in 1996 by a team inside accounting giant Deloitte & Touche, and subsequently spun off in a management-led buyout in 1999. The firm's focus is on a diversified array of professional services, but a huge growth driver over the past few years has been public companies' growing need for support in complying with Sarbanes-Oxley requirements.
Now back to our "who is being crazy" question. We can't blame Mr. Market for having an adverse reaction when Resources reported its fiscal first quarter earnings at the end of September. It was, in a word, gross. Though the firm managed to grow revenue 18% year-over-year, net income was up a decidedly unimpressive 5%. But what seemed to really get investors' collective goat was the fact that the company blamed the severe margin compression on giving its associates extra vacation benefits.
While the market's reaction didn't make Resources eye-poppingly cheap -- it still trades at over 20 times its fiscal 2008 earnings estimates -- the drop has brought the stock down to the historical low end of its P/E multiple (which was as high as 63 in 2004). And this is for a company that's still expected to grow 20% per year over the next five years. Additionally, some, such as fellow Fool Rich Smith, have taken the position that providing the extra vacation time could have been a savvy move that could help Resources hang onto good employees.
One of CAPS' top players, MikeSu007, seems to agree. He recently quipped: "[Resources'] recent pullback offers a good opportunity to get in at a great price, based on pure panic-sell-silly slap-me-stupid news."
So has the turmoil created a good buying opportunity? Or is Resources' margin drop a sign of things to come? Let the community know what you think -- head over to CAPS and share your thoughts with the other 65,000-plus players currently part of the community. Even if you'd prefer to pass on Resources, you can check out a couple of the other stocks listed above or any of the 5,000 stocks that are rated on CAPS.
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