"'Don't catch a falling knife' ... 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 runs the thesis of my recurring Fool column "Get Ready for the Bounce," in which we search among the wreckage of Mr. Market's overturned cutlery drawer, hoping to find future winners in a pile of 52-week losers. But do we really need to sit around for a whole year, waiting for a potential bouncer?
I say nay. Sometimes, stocks fall far in far less time than a year -- and like a superball dropped from the balcony, the harder they fall, the higher they bounce. Today, we're going to look at a few equities that've suffered dramatic drops over the past week. With a little help from the 135,000 members of Motley Fool CAPS, we hope to find an opportunity or two for you:
|
Stock
|
How far from
52-week high?
|
Recent Price
|
CAPS Rating
(out of 5)
|
|
SandRidge Energy (NYSE: SD )
|
(88%)
|
$8.45
|
*****
|
|
Boeing (NYSE: BA )
|
(40%)
|
$41.88
|
***
|
|
KeyCorp (NYSE: KEY )
|
(72%)
|
$5.20
|
**
|
|
MBIA (NYSE: MBI )
|
(78%)
|
$4.22
|
*
|
|
Zions Bancorp (Nasdaq: ZION )
|
(78%)
|
$11.90
|
*
|
Companies are selected by screening on finviz.com for abrupt 10% or greater price drops over the past week. 52-week high and recent price data provided by finviz.com. CAPS ratings from Motley Fool CAPS.
Five super falls -- one superball
Last week was a tough one for bankers and Boeings. MBIA found itself hit with a credit downgrade, while banking investors generally were spooked by the closure of more banks. And of course, Boeing's problems have been widely publicized.
But for the life of me, I can't see why SandRidge Energy got hit. I mean, sure, natural gas supplies in storage grew more than expected the week before, but last week's increase was relatively muted. (Heck -- the stock even got itself an upgrade Wednesday.) Nor am I the only person confused by this development. While CAPS members give relatively low marks to most of the companies on today's list, SandRidge stands apart with a superlative five-star rating.
Let's find out why.
The bull case for Sandridge Energy
kpointer1 praises SandRidge for having "a smart and business-savvy CEO in Tom Ward in an industry guaranteed to rebound ... With the growing demand for alternative fuels as well, natural gas, which accounts for most of [SandRidge's] business, is poised to spike..."
Speaking of nat-gas, mikejw addresses the major reason for SandRidge's declining fortunes head-on: "Natural Gas prices can't stay below the industry's average cost of production. Sooner of later either prices will rise to match cost of production or existing projects will be shelved to reduce capacity in the industry."
So which will it be? "Sooner" or "later?" CAPS All-Star neumann101 lends us the benefit of experience: "Look for gas prices to rise by end of the year. This is normal pricing in boom then bust gas industry. It takes about 18 months to reduce excess capcity following a price spike. Peak prices were in June of 2008."
So 12 months down, and six more to go. The question naturally occurs: is it still too early to buy into the gas story, or is the iron in fact red hot -- and it's time to strike? As I explained when discussing the prospects for United States Natural Gas (NYSE: UNG ) last month, I personally believe that nat-gas prices must soon turn around -- just as oil prices did after bottoming a few months ago. But that's just the macro investment thesis. What about SandRidge in particular? Is it a buy?
Well, consider: At last report, SandRidge boasted roughly 1.9 trillion (yes, that's a "T") cubic feet of proven natural gas reserves. Incidental to its flagship gas business, the firm also has some 43.2 million barrels of proven oil reserves -- equivalent to about 259 billion cubic feet if converted at the standard industry metric. So call it 2.1 trillion cubic feet total.
Now traditionally, natural gas is priced in terms not of "cubic feet," but of the BTUs produced by burning these "cubic feet" -- roughly 1,030 BTUs per foot cubed -- and right now, the spot price on these BTUs is $3.80 per million BTUs. So the value on these reserves works out to:
- 2.1 trillion cubic feet
- times 1,030
- divided by 1 million
- times $3.80 ...
... equals: $8.2 billion. Meanwhile, SandRidge itself carries an enterprise value of just $4 billion -- half the value of its hydrocarbon assets. Compare SandRidge to a rival such as Chesapeake Energy (NYSE: CHK ) , which has 12 trillion cubic feet of gas and equivalent oil reserves, and you'll find a similar discount -- Chesapeake's reserves are "worth" $46.9 billion; the company is selling for only $25.7 billion.
Foolish takeaway
These companies are selling for prices far below the value of their assets. If neumann101 is right and the prices of those assets will rebound later this year -- or heck, even if it takes five years to right the ship -- now seems to me a fine time to buy ... and hold.
That said, I'm the furthest thing from a commodities expert. (Which is why I don't buy the stocks, myself. I know my limitations.) While I'm intrigued by the pricing trends I see in this industry, what I'd really like to know is what you think about SandRidge Energy. Surely there's a Fool or two out there who knows this industry better than I.
So clue a Fool in, will ya? Click on over to Motley Fool CAPS, and tell us what you think.
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