Drop-Dead Gorgeous Stocks

"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."

So goes the thesis of my weekly Fool.com column "Get Ready for the Bounce." Therein, I run the 52-week-lows list compiled by Nasdaq.com through the "wisdom of crowds" meter that we call Motley Fool CAPS. And out the other end comes a list of stocks that have fallen so far, Foolish investors figure they're just bound to bounce back soon.

But is there a way to cash in on fallen angels who've plummeted even further? Perhaps. If a stock that's fallen for one year straight has headroom, then maybe a stock that's fallen even farther, and longer, has room to soar back even higher -- in which case, an apparently left-for-dead stock could offer us a drop-dead gorgeous entry price. We're going to test that thesis today, starting with five stocks that just hit their five-year lows:

 

Recent Price

CAPS Rating

(5 max):

Sterlite Industries India  (NYSE: SLT  )

$4.01

*****

HRPT Properties Trust   (NYSE: HRP  )

$3.04

****

LSI Corporation  (NYSE: LSI  )

$3.50

***

Advanced Micro Devices  (NYSE: AMD  )

$3.03

**

Hovnanian Enterprises  (NYSE: HOV  )

$3.90

*

Companies are selected from the "New 5-Year Lows" list published on MSN Money on Thursday. CAPS ratings from Motley Fool CAPS.

Left for dead? Or drop-dead gorgeous?
Each of the stocks listed above has shed between 45% and 90% of its value over the past year alone -- numbers unthinkable before our current economic storm broke upon us. But while Wall Street has left 'em all for dead, Main Street opinions are all over the map.

Hovnanian, we hate. LSI, we like (kinda). But who do we love? Sterlite Industries.

The bull case for Sterlite Industries India

  • CAPS legend pencils2 introduced us to Sterlite nearly a year ago as an: "Indian producer of copper, zinc, and aluminum ... They have a 42% share in the copper market, are majority shareholder of Hindustan Zinc which has a 61% share of Indian zinc market, and are majority shareholder of Bharat Alumnium which has a 25% share of Indian aluminum market."
  • Furthermore, as ronaldjefferson explained in March, Sterlite is: "a new company in India, the 2nd largest population in the world. Not only will India produce the cheaper car (Tata Motors (NYSE: TTM  ) ) for its people, it will call for more and more copper to be produced by this 'local' mine."
  • And yet, as tantrum1 pointed out in July, Sterlite is now a: "steal at the 1st time it is below its ipo price. Great P/E with room to grow."

So to recap: In Sterlite we have the opportunity to own a dominant market share for essential metals in a rapidly modernizing and populous nation at a pre-IPO price. And what a price it is!

Sterlite's most recent quarterly report shows a company with $4 billion in cash and short-term marketable securities on its balance sheet, versus just $352 million in short- and long-term debt. For the math-impaired, that means the entire company is selling for about $3 billion, which is less than its net cash ($3.6 billion).

Sounds too good to be true, right? Well, it almost was. In July, SCVChost urged us to "Check out the Asarco Deal" -- in which Sterlite bid $2.6 billion of its cash to buy copper-mining company Asarco. That would have given shareholders a bigger company, but drained the cash cushion in the process. Fortunately, a decline in the world price of copper caused Sterlite to rethink the wisdom of this deal, and it now seems likely to fall apart.

While a withdrawal of its bid could certainly result in messy litigation, a la Sallie Mae's tiff with J.C. Flowers, two other possibilities suggest themselves. First, Asarco could pull a "Home Depot" (NYSE: HD  ) and sell itself to Sterlite for a lower price. Even better, Asarco might let Sterlite off the hook -- leaving Sterlite once again priced at less than its own net worth. If that's the way things ultimately play out, I really can't see any reason not to own Sterlite -- not when you're really owning cash, plus a profitable business thrown in for free.

Time to chime in
Of course, that's just my opinion. Click on over to Motley Fool CAPS and tell us yours.

Motley Fool CAPS: It's fun, it's free, and it just might make you famous.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 559 out of more than 120,000 members.

Tata Motors and Sterlite Industries are Motley Fool Global Gains picks. The Home Depot is a Motley Fool Inside Value recommendation. The Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 28, 2008, at 1:40 AM, Ruhaan wrote:

    It does not make any sense. Mr Market is manic depressed at the moment. Dont even try to put console it. It just sits on like a salt on it wounds. It will thrash SLT again tomorrow. I hope it brings it below $1... I will bet my house on it

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