"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 the thesis of my weekly Fool.com column "Get Ready for the Bounce," where I run Nasdaq.com's 52-week-lows list through the "wisdom of crowds" meter we call Motley Fool CAPS. 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, maybe a stock that's fallen even farther, for even longer, has room to soar back even higher. In that case, an apparently left-for-dead stock could offer us a drop-dead gorgeous entry price. We'll test that thesis today, starting with five stocks that just hit their five-year lows:
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Company
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Recent Price
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CAPS Rating (5 max):
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RC2 (Nasdaq: RCRC )
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$5.81
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*****
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Southwest Airlines (NYSE: LUV )
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$7.03
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***
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Nissan Motor (Nasdaq: NSANY )
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$5.98
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***
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Eastman Kodak (NYSE: EK )
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$4.53
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*
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The New York Times (NYSE: NYT )
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$4.97
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*
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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 30% and 80% of its value over the past year alone, and each currently sits at or near its five-year low. Many CAPS investors will tell you that Nissan's stalled, while Southwest's on autopilot, going nowhere. CAPS sentiment on Kodak is negative (heh), and the community's opinion of New York Times isn't fit to print.
But there's one stock we do find worth playing around with: RC2. Ask 99 of our very best investors – our CAPS All-Stars -- whether they like the stock, and 96 of them will nod enthusiastically. Here's why:
The bull case for RC2
The Fool's own TMFselzhanik introduced us to this stock way back in 2007:
What really gets my wife and I interested in this particular stock at this particular time is the partnerships that this company has....And they've got a new partnership with Nickelodeon for toys based on Dora the Explorer, Backyardigans, Blue's Clues, and Spongebob Squarepants. ...And, I shouldn't forget other licensed properties, such as Winnie the Pooh -- ...as well as Bob the Builder, The Wiggles, Barney, Sesame Street, Disney (NYSE: DIS ) Princess, Finding Nemo and Spiderman.
Another All-Star, jtallenmd, enlightens us on just why RC2 is on this list of all-time underperformers in the first place. As jtallenmd wrote in May:
This company was hit hard by lead based paints from one of their Chinese suppliers. They have worked hard to reestablish their credibility. They have a fair number of wel known brands including ... John Deere (NYSE: DE ) among others. This one will recover.
It almost goes without saying that our third and final All-Star agrees with his peers. After taking a good, hard look at the company, DaretothREdux exclaimed early this month:
Talk about undervalued! Look at the book value and forward P/E on this stock. It's like a value play dream. Sure they put lead in their toys, but you are assuming that the average consumer does two things: 1. cares 2. checks to see which company made the toys they are buying.
Taking the hint, I did as Dare suggested, and checked into RC2's book value and valuation. Priced at just 0.27 times book value, RC2 is valued at just one-ninth the price-to-book ratio accorded to Hasbro, and one-eighth of what Mattel gets.
Viewed from an earnings perspective, RC2 looks a bit pricey relative to its larger rivals -- but only when valued on its past earnings. Its 15 P/E seems to price the stock at a premium to the 10-ish multiples that Hasbro and Mattel command.
However, if analysts are right in their estimates of RC2's earnings next year, the stock trades at only four times those "forward" earnings. Hasbro and Mattel, in contrast, have essentially the same P/Es based on forward or trailing valuations. Far from being baselessly overpriced relative to the competition, RC2 might actually be a bargain.
Time to chime in
Then again, the advent of the Chinese lead paint scandal sure took a lot of people by surprise. Maybe there are other skeletons in RC2's closet that we haven't yet noticed?
If you've got some insight into the stock, here's your chance to wow us. Click on over to CAPS and clue us in.
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