Get Ready for the Bounce

"Don't catch a falling knife," as the old saw commands. (Pardon my mixing a cutlery metaphor.) 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 where Motley Fool CAPS comes in.

Today, we once again stand beneath Mr. Market's silverware drawer, measuring which knives have fallen the farthest. Then we'll call on CAPS to ask which of these stocks -- if any -- Foolish investors believe are ready for a rebound. Let's meet today's list of contenders, drawn from the latest "52-Week Lows" list at WSJ.com:

Company

 

52-Week High

Recent Price

CAPS Rating (out of 5)

Allied Irish Banks (NYSE: AIB  )

$10.42

$1.70

*****

AMAG Pharmaceuticals (Nasdaq: AMAG  )

$52.49

$23.49

**

Arena Pharmaceuticals (Nasdaq: ARNA  )

$8.00

$1.99

**

Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Friday last week. 52-week high, recent price, and CAPS ratings from Motley Fool CAPS.

The Scarlet Letter sell-off
Whatever the reasons, stocks beginning with the letter A had a particularly tough week. Arena led off a list of diet drugs dissed by the Food and Drug Administration, sparking a 42% sell-off in the stock. AMAG soon followed (albeit for different reasons), along with Anthera Pharmaceuticals (yet another A, for apparently no reason at all).

But the damage wasn't limited to the drug sector. As the cost of insuring Irish debt rose to record levels, and Barclays Capital warned that the mess may be too big for even the government to handle unassisted, investors took out their wrath on the country's biggest bankers, dropping Allied Irish Banks a good 11% on Friday, and slicing 7% off of Bank of Ireland -- which is getting perilously close to a 52-week low itself.

Regardless, investors seem much more optimistic about the prospects for a revival at Allied Irish Banks. Is there reason for hope? We've polled the 170,000 (and growing) army of CAPS investors, and here's what they tell us.

The bull case for Allied Irish Banks
While everyone else is worrying about Ireland's ability to handle its debts, EggplantWizard actually thinks it's a positive that: "the irish government [is] propping this bank up without shareholder value dillution." If Allied Irish should survive the crisis, EggplantWizard thinks there should be opportunity to profit from owning "a good underlying business when you disregard toxic assets."

As yoselk points out, "the bank has a strong position ahed after cleaning it's bad assets and passed the stress test of the regulators." Seems that ought to be worth something.

And CAPS member michael2004 believes that the "very low price to book value makes this an attractive value play to me."

But is that P/B ratio low enough to justify buying a profitless bank? Moreover, a bank located in a foreign land, where you lack firsthand knowledge of the company, don't know what customers think of it; where really, you're flying blind, with only "the numbers" to guide you?

Depends on the numbers
If the stock looks cheap enough, maybe it is worth taking a flyer. So let's see how the Irish banker compares with a few of our Stateside brand-name banks:

Company

Return on Assets*

Return on Equity*

Current Price-to-Tangible Book Value

Allied Irish Banks

0.8%

13.3%

0.1

Bank of America (NYSE: BAC  )

1.1%

14%

1.1

Citigroup (NYSE: C  )

0.8%

9.9%

0.9

JP Morgan Chase (NYSE: JPM  )

0.6%

8.6%

1.4

Wells Fargo (NYSE: WFC  )

1.4%

15.8%

1.8

*Average over the past 10 years. Data courtesy of Capital IQ, a division of Standard & Poor's.

Relative to its U.S. peers, Allied Irish Banks sports returns on assets and equity roughly in the middle of the pack, suggesting the valuation is at least fair. Meanwhile, at today's prices, the company's tangible book value is being valued at almost nothing -- the merest fraction of what investors are paying to own the assets of a JP Morgan or a Wells Fargo.

Time to chime in
So, could Allied Irish Banks "go to zero?" Sure, it could (if the government permits it to). But if Allied Irish Banks survives, and if it should ever be valued along the lines of a JP Morgan or a Wells Fargo, you're looking at hundreds and hundreds of percent of potential upside. To me, this suggests that Allied Irish Banks could be worth a gamble.

But that's just my opinion. What I'd really like to know is what you think Allied Irish Banks' fate will be. Click over to Motley Fool CAPS now and tell us what you think.

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. 568 out of more than 170,000 members. The Fool has a disclosure policy.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.


Read/Post Comments (6) | Recommend This Article (9)

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 September 20, 2010, at 11:52 PM, steven107 wrote:

    I'm sure if you wait long enough AIB will probably go up again, but y'all at the fools have recommended it at so many price levels between $40 and $1 over such a long period of time (since march 2007?), that anyone who bought it before now would be hard pressed to recoup their investment. An important piece of investment advice is: If you lose money in a stock, you are not required to make back those losses via hoped for gains with current or even double-down new positions in the same stock.

    Now I know this will start to sound like Jeff Foxworthy, but bear with me.

    1.) Relying on an outside benevolent authority figure whether it be God or the Government to keep your stock from going down--noted in this quote: "So, could Allied Irish Banks "go to zero?" Sure, it could (if the government permits it to)"--may be a sign that it's time to look for a more practical investment idea.

    2.) If the following phrase ever comes up in regards to your particular investment idea in your investment thesis "...if Allied Irish Banks survives...", it might be time to look for a more practical investment idea.

    3.) Referring to your own investment thesis as: "...a gamble." might indicate that it might be a good time to look for a more practical investment idea.

    4.) Chasing any stock from $40 down to low single digits over the course of 3 years, might indicate that it is possible you should seek out a more practical investment idea.

    5.) Having to bring an ugly friend named ARNA (CTIC must not have been available, was at home washing its hair) to make AIB look prettier to a potential suitor, may indicate that it is time for you to seek out a more practical investment idea.

  • Report this Comment On September 21, 2010, at 2:13 AM, r1y1a1n wrote:

    Well, what can I say other than to those of us that own it...the fasten seatbelt light has been on for a while and will continue to be on. However, once our plane battles through the seemingly-endless-storm hopefully, with any luck, we can all be sippin' on some margaritas in paradise with the huge upside potential. For a $1.70 I think almost any investor can handle the risk and be fine if the plane crashes. Sure, you might have to pass up that latte at Starbux for the next couple weeks, but hey gotta give some to get some. I would certainly not go all out here...I mean Diversification is and always has been the golden rule. Either way, I'm 20 years old and have a chunk of this puppy for better or worse. Time is on my side with AIB. In 10 or 15 years I want to be telling people how I bought this stock for under $2 dollars a share and now look at that lucky emerald gleam!

  • Report this Comment On September 21, 2010, at 2:34 AM, goalie37 wrote:

    steven107 is exactly right on this one. Throw in a paragraph about how you win if the shooter doesn't roll a 7.

  • Report this Comment On September 21, 2010, at 7:00 AM, banktech123 wrote:

    The $1.70 might look cheap, but do not forget that AIB still has to go though a rights issue which no doubt will almost destroy current equity by dilluting it heavily. Best is to wait till after the RI if you really want to be speculatively invested here.

    E.g. IRE just went through a RI, so is better capitalised now but the price is still heavilly under the original theoretical ex rights issue price, which should have represented fair value. Expect a simila price action with AIB.

  • Report this Comment On September 24, 2010, at 11:05 PM, candomarty wrote:

    I voted with my Sell button last week on my entire position in AIB. It's been fun, but...as noted above, if you have to depend on an external force (the Irish government) to rescue this bank, it's probably not going to recover anytime soon. Instead I'm adding to my position in another, non-Irish European bank, Banco Santander (STD) which, though it's HQ'd in Spain, is very well diversified in other countries (only 25% in Spain itself) and should be just fine on its own merits in the market.

  • Report this Comment On September 30, 2010, at 10:21 AM, steven107 wrote:

    I just read today at bloomberg: "...government preparing to take majority control of allied irish banks plc..."

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