5 Superball Stocks

" '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 with dramatic drops over the past week. With a little help from the 140,000 members of Motley Fool CAPS, we hope to find an opportunity or two for you:

Company

How Far From 52-Week High?

Recent Price

CAPS Rating

(out of 5):

Cardinal Health (NYSE: CAH  )

-49%

$26.27

*****

United States Natural Gas  (NYSE: UNG  )

-74%

$10.28

****

SunTrust Banks (NYSE: STI  )

-66%

$20.65

**

Abercrombie & Fitch  (NYSE: ANF  )

-38%

$30.19

**

CIT Group (NYSE: CIT  )

-88%

$1.50

**

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 rough one for these five stocks. Starting at the bottom, early in the week CIT's stock got slapped when the company "deferred" an interest payment. Abercrombie & Fitch took a hit when it first reported abysmal same-store sales for August, then suffered the indignity of a downgrade from the analysts at Citigroup (NYSE: C  ) . SunTrust reported no bad news, but -- along with peer bank Regions Financial (NYSE: RF  ) -- was dissed by Stifel Nicolaus as "richly valued."

And U.S. Natural Gas? I don't have to tell you that the natural gas sector has been under pressure for some time now. But the most interesting story this week has to be that of drug distributor Cardinal Health. Far from reporting bad news, the company finalized its spinoff of CareFusion. Here, it seems, we have an example of a company's "market cap" shrinking simply because it voluntarily became smaller. How bad can that be?

The bull case for Cardinal Health

  • If you ask CAPS All-Star mrindependent, he'd tell you it's not bad at all. To the contrary: "this stock is extremely cheap compared to its historic valuations. I think Cardinal Health will remain a key player regardless of the upcoming changes to health care."
  • And while those valuations are in flux post-spinoff, and fellow All-Star 00100 expects we will "need some time for the [financials] to settle out after divestiture," this CAPS member still thinks that the company's "[g]ood cash flow" and "[n]ominal debt" make this stock a winner.
  • As ngannet1221 put it, Cardinal Health shares have been "unfairly beaten down by spinoff of ConFusion, oops I mean CareFusion."

After reviewing Cardinal Health's best guess at what its financials would have looked like if in 2006 the company didn't have CareFusion, I believe that our CAPS members have some basis for optimism, but I don't share it. Here's why:

Strip out CareFusion's contribution to Cardinal Health for the past year, and you would be looking at a company with $95.6 billion in trailing revenue, from which it netted about $765 million in profit. So impressive revenue, yes. A chance to profit from health-care reform, sure. But the company's 0.8% net margin hardly sets me to drooling.

The more so when you look at the valuation. At $9.4 billion in market cap today, Cardinal Health sells for about 12 times its putative trailing 12 month earnings. That's hardly prohibitive, but relative to the 10% annualized five-year growth that analysts expect out of Cardinal Health going forward, it doesn't look particularly cheap, either.

Foolish takeaway
Now mind you -- 00100 is 100% right that it will take some time to get a firm read on Cardinal Health's numbers. The "unaudited pro forma condensed consolidated financial information" from which I drew the numbers above is subject to change upon auditing. It also doesn't tell us much in the way of whether the company might be generating more (or less) cash from its business than it reports as net income under GAAP. But initial indications aren't great.

My advice: I see no compelling reason to own Cardinal Health today. For the time being, stay away.

Buy hey, feel free to disagree. Like I said, there's a lot that's unclear about the company's status after the spinoff. If you know more than I do about the company, don't keep it to yourself: Tell us why Cardinal Health's a buy.

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 was recently ranked No. 491 out of more than 140,000 members. The Fool has a disclosure policy.


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  • Report this Comment On September 09, 2009, at 2:28 PM, kkawohl100 wrote:

    Citigroup (C) has a book value of close to $5 and will probably be at $8 by the end of the year.

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