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)

Genco Shipping (NYSE: GNK  ) $26.49 $14.24 *****
General Maritime (NYSE: GMR  ) $8.82 $3.18 ****
Clearwire Corp.  (Nasdaq: CLWR  ) $8.60 $5.21 ***
Evergreen Solar  (Nasdaq: ESLR  ) $1.87 $0.60 **

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.

If there were ever a time of year you could use some extra coin a-jingling in your pocket, it's Christmas. Sadly, a lot of investors saw their coins lost among Mr. Market's sofa cushions last week when their stocks settled down to new 52-week lows.

Beginning at the bottom, Evergreen Solar is still shedding needles in the wake of its announced plans to recapitalize the company with a new round of debt financing. Last week's reports that European subsidies for solar power plants are being cut back didn't help matters much. Result: Never a particularly strong performer, Evergreen is once again back in penny-stock land.

Debt's also the problem at Clearwire. Earlier this month, Clearwire added $1.3 billion to its debt load in an attempt to tide itself over till the 4G revolution takes hold. The company's massively leveraged and currently burning about three times its own market cap's worth in cash each year. The hope was that Sprint Nextel would come through for shareholders, buy Clearwire, and save its investors from their mistakes. No such luck. Last week, Sprint confirmed it's standing pat at a 54% stake in Clearwire and has no intention of buying more.

Now here's the crazy thing -- "debt" seems to be the big theme this week, right? Evergreen and Clearwire have got it, and investors don't like it. Yet, the two highest-rated stocks on today's list -- oil tanker General Maritime and dry-bulk hauler Genco Shipping -- are both arguably more leveraged than either of these companies. So why is it that investors seem willing to forgive General-M's flaws, but not Clearwire's? Why are they positively giddy with excitement to own five-star-rated Genco?

The bull case for Genco Shipping & Trading
I can't say as I understand the reason for optimism about money-losing General-M ... but as for Genco Trading, it's patently obvious: The stock looks cheap.

And I mean dirt cheap; it's 3.3 times earnings cheap (and 5.2 times next year's earnings). CAPS member shaileshnita calls this a "great" price for Genco and also points out the attractiveness of the company's other metrics: "Return on Equity=15, P/B=0.53." (To be clear, these metrics do fluctuate over time. For example, as of today Genco's ROE is a bit lower than shaileshnita states, its price-to-book ratio -- a bit cheaper.)

Still, as CAPS investor Option1307 points out, "GNK has some of the better valuation metrics relative to the rest of the sector." Dry shipping flagship DryShips (Nasdaq: DRYS  ) , for example, costs 28 times trailing earnings today, while Eagle Bulk (Nasdaq: EGLE  ) will set you back 12 times earnings, and even Diana Shipping (NYSE: DSX  ) fetches an 8-times multiple.

And yet, mightn't Genco be "cheap for a reason"? While bullish on the company, CAPS member mattcguy acknowledges there are risks in this stock: 

The Baltic Dry Index has dropped 50% since September, and is at a very low level by historic standards. Also, GNK has a lot of long term debt which makes the stock risky and particularly vulnerable to an economic slowdown. These are the reasons why the stock is not loved right now and is trading at a 52 week low.

Regardless, mattcguy is of the opinion that "the future growth of GNK will exceed market expectations ... [which] are VERY low right now."

Prepare to board?
And he's not the only one. Why, just last week, Fool analyst Paul Chi went on record calling Genco "outright cheap" -- priced so low that essentially any good news at all could send the shares flying and close the valuation gap with its peers.

As for me, I'm not necessarily saying that I disagree with my Foolish colleagues. I'm just saying that this stock scares me spitless. I mean, over the past 12 months, Genco has burned through $674 million in cash. And while I admit that the Great Recession hasn't exactly been "great" for the shipping business, just take a look at how Genco fared in the years when business was booming for commodities shipments and their shippers. From 2005 through 2009, for example, this company somehow managed to burn through more than $1.2 billion in free cash flow -- despite floating in the middle of the biggest commodities boom in recent memory.

Foolish takeaway
I like companies that do well in good times. I love companies that can figure out how to prosper even in lean times. Sadly, Genco looks to me like the kind of business that can do neither. Whatever the economy -- Genco fails to profit from it. And for me, that's just not the kind of stock I want to own.

But hey -- that's just my opinion. Think I'm wrong? Tell me why.

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's currently ranked No. 606 out of more than 170,000 members. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (11)

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 December 20, 2010, at 6:59 PM, platinumatt wrote:

    Between 2005 and 2009 Genco has grown its total assets from $490 million to $2.337 billion dollars!! Their cash has clearly gone to building their fleet.

    Thier balance sheet is positive. They are not losing money.

    the only time i can find that Genco had a negative change in cash was in 2007. During this time, they grew their assets from $578 million in 2006, to $1.653 BILLION in 2007. The negative change in cash was due to ship acquisitions, not to poor management.

    Look at genco's balance sheet now. They are making money. They have a positive cash flow and net income, all while buying more ships to profitt from when the economy turns around.

    If you truly believe Genco is a bad stock pick, I'd like to hear more of a why and less of a what.

  • Report this Comment On December 20, 2010, at 11:30 PM, phoquenut wrote:

    "3.3 times earnings cheap (and 5.2 times next year's earnings)."

    Am I the only one instantly concerned with a recommendation to buy a company that projects negative growth in earnings year-over-year?

    The reason for Dryships valuation at 28 times earnings, is that their forward P/E is estimated to be 5.5 times earnings for 2011, indicating substantial growth in earnings.

    Making a case to buy a stock by mentioning only the current P/E is a lot like determining the strength of a baseball team by measuring how many hits they had. Hits are good, but it is the runs that count.

    If you look at these stocks side-by-side, Dryships has a much more attractive 5 yr. PEG Ratio of 0.63 vs. Genco's abysmal 5.12.

    In a sector where all your competitors are projecting substantial growth, why are you projecting less revenue year over year, Genco?

  • Report this Comment On December 22, 2010, at 10:30 AM, multi007 wrote:

    DRYS is tied to the bulk shipping index. This rally we are experiencing is a financials rally. Once the consumer rally starts, then the bulk shippers will climb. DRYS is a long term stock no doubt, but the upside potential outweighs the downside. Unfortunately I feel a consumer rally is tied to the unemployment rate. But until then, im long on DRYS 5 years out.

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