"'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."
That's 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 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):
|
|
Arcelor Mittal (NYSE: MT )
|
(20%)
|
$34.02
|
*****
|
|
United States Steel (NYSE: X )
|
(33%)
|
$34.39
|
****
|
|
Bank of America (NYSE: BAC )
|
(39%)
|
$14.58
|
***
|
|
Research In Motion (Nasdaq: RIMM )
|
(33%)
|
$58.73
|
***
|
|
Garmin (Nasdaq: GRMN )
|
(24%)
|
$30.26
|
***
|
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
If you own stocks, chances are good you're poorer today than you were last Monday -- maybe significantly so. The S&P 500 lost 4% last week, with 556 stocks posting losses of 10% or greater. The companies named above demonstrate the breadth of the collapse -- from financials to tech to the "real economy" of steel, they're down across the board.
Why? The reasons vary from obvious to obscure. For example, it's hard to pinpoint a single cause for the selloff at B of A. On the other hand, in the case of nuvifone-maker Garmin, investors seem to have been spooked by the arrival of a credible rival in the form of Motorola's (NYSE: MOT ) "Droid" -- a navigation-enabled phone with built-in Google (Nasdaq: GOOG ) maps. (Similar fears could underlie the sell-off at Research In Motion.)
Steelmakers Arcelor Mittal and U.S. Steel both released earnings last week, with the latter reporting not only a loss in Q3, but predicting another one in Q4. Not so with Arcelor, however.
The bull case for Arcelor Mittal
As CAPS All-Star Pat999 informs us, Arcelor:
... produces 1/3 of the world's steel. They are the largest steel producer in the world, and produce WAY more than second place. As the global economy recovers and countries start getting construction going as a way of jump starting their economies and hiring the unemployed they'll need steel to do it.
Relic666 agrees, calling Arcelor a: "Definite long term play. Markets will eventually bounce back, people will start buying again, and construction will pick up and go through a catchup phase. Steel will rise once again."
Last but not least, as bjoernl points out (tongue firmly inserted in cheek): "Price to book like a bank, but does real business ;)." Way to kick B of A when it's down, bjoernl. But he has a point.
One Fool's analysis
Priced at less than book value, Arcelor's valuation does intrigue. And while it's true the company carries a sky-high P/E -- you know what they say about cyclical industries: You buy 'em when the P/E looks expensive, and sell 'em when they look cheap.
Why is this good advice? Well, sometimes the P/E doesn't tell you quite as much as people give it credit for. For example, despite earning a profit in Q3, consecutive GAAP losses in the three preceding quarters have this company still rated as "losing money" over the last 12 months. But in fact, Arcelor generated positive free cash flow of $6.9 billion over the same time period. By my calculations, this has the stock trading for less than 10 times its $67.2 billion enterprise value.
To me, that seems a fair price to pay for the world's biggest steel shop. There are advantages to being the biggest, you see. While we see U.S. Steel predicting another loss in the current quarter, Arcelor just promised to deliver a profit in Q4, and predicted that its "shipments and average steel-selling prices" will be "higher" in Q4 than they were in Q3.
Time to chime in
Could Arcelor be wrong about that? Sure it could. And I could be wrong about the stock's bounce-ability. (Indeed, if you check out my CAPS performance on the link below, you will see that I am wrong about such things more than 30% of the time.)
Which is where you come in. If you've got an opinion on Arcelor ... or on U.S. Steel ... or on the steel industry in general -- we'd love to hear what you think. Click over to Motley Fool CAPS now, and give us a shout.
Motley Fool CAPS: It's fun, it's free, and it just might make you famous.
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