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5 Superball Stocks

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In my recurring Fool column, "Get Ready for the Bounce," we search for future winners in a pile of 52-week losers. But do we really need to sit around for a whole year, waiting for a fallen stock to bounce back?

 Nope. Sometimes stocks fall hard, 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'll look at a few equities that've suffered dramatic drops over the past week. With a little help from the 170,000 members of Motley Fool CAPS, we hope to find an opportunity or two for you:


How far from 52-week high?

Recent Price

CAPS Rating
(out of 5)

PDL BioPharma (Nasdaq: PDLI  ) -25% $4.93 *****
Mosaic (NYSE: MOS  ) -7% $83.02 ****
Teck Resources (NYSE: TCK  ) -16% $55.08 ****
Rare Element Resources (NYSE: REE  ) -28% $47.22 *
Molycorp (NYSE: MCP  ) -29% $44.63 *

Companies are selected by screening on for abrupt 5% or greater price drops over the past week. 52-week high and recent price data provided by CAPS ratings from Motley Fool CAPS.

Five super falls -- one superball
There's no two ways about it. If you owned any of the five stocks named above last week, you're significantly poorer for it today. So what went wrong?

Beginning at the bottom, it was a particularly tough week for the twin yo-yos of rare-earths mining, Rare Element and Molycorp. As fellow Fool Dan Dzombak pointed out last week, these companies give new meaning to the concept of "rare" earths, because neither one is currently mining much of anything. Of course, they hope to reap beaucoup profits one day, supplying a market starved for export-strangled Chinese rare-earth metals. But there's a hitch: On Friday, the WTO issued a preliminary finding that declared China's export restrictions illegal. Today's supply constraints could be only temporary, and if they disappear before Rare Element and Molycorp get their operations up and running ... well, now you know why investors are nervous.

Similar story for Teck Resources. While not exactly "rare," zinc supplies are getting pinched by the same Chinese export quotas that shut the tap on rare-earths exports. If, however, these quotas are declared illegal, then you can expect greater zinc supply on the market, and lower zinc prices.

Moving on to Mosaic, we find worries of a different sort: Grain prices. They're starting to drop, and the lower the profits farmers reap from their crops, the less incentive they have to buy Mosaic's fertilizer to maximize those crops/profits. Result: A 6% drop in Mosaic's market cap.

And finally, we come to the top-ranked stock on this week's list, tiny patent warehouse PDL BioPharma. PDL's problem is that on Wednesday, it settled a dispute with AstraZeneca (NYSE: AZN  ) over patent royalties that the latter says it never should have paid (a result of PDL's patent having been ruled invalid.) Rather than litigate the rights and wrongs of the situation, PDL agreed to refund AstraZeneca's MedImmune subsidiary $92.5 million, and call it even. PDL shares lost 3% immediately following the announcement, and continued to tumble all week, ending at a 10% loss -- so clearly, many investors were upset at the news.

Many, but not all ...

The bull case for PDL BioPharma
Its MedImmune reaction notwithstanding, CAPS member jakevf insists PDL stock is still very healthy, showing "high cash flow and royalty based income."

CAPS member lytri adds that the company still has "a number of years on existing patents." The MedImmune business isn't the only arrow in its quiver, and the company still has a stable of licensees providing it revenues -- Wyeth, Genentech, and Eli Lilly (NYSE: LLY  ) to name just a few.

And these are factors that have attracted the interest of none other than noted value investor Seth Klarman, founder and president of Boston-based Baupost Group. Practically dancing with glee, CAPS All-Star tad40 pointed out last week that Klarman's company already owns 5.6 million shares of PDL -- and that this week's sell-off gives you the chance to own the company at a price "14% below his buy point."

Follow the leader?
"But why did Klarman purchase those shares in the first place," you ask? That's easy: Because the stock is cheap. Screamingly so.

Thanks partly to last week's sell-off, PDL shares currently trade for the low, low price of just 6.2 times trailing earnings, and 4.2 times the amount of profit it's expected to earn this year. For a company that most analysts believe will grow at 26% per year over the next five years, that seems ridiculously cheap. And when you notice further that PDL generates much more free cash flow than it reports as net income ($208 million FCF versus $145 million net income), it's hard to imagine how this particular superball could do anything else but bounce back. The discount on this one really does look too good to pass up.

Time to chime in
Or is it? Sure, the stock looks cheap. But considering that PDL doesn't really create drugs of its own, it's very dependent on the willingness of its customers to pay up for the patents it controls. So far, it's been successful -- and profitable -- in this regard. But what if the MedImmune settlement is a portrait of things to come?

Judging from the stock's five-star rating on CAPS, most Fools don't seem too worried about this prospect -- but perhaps you are not "most Fools?" If you've got concerns about PDL, its valuation or its business model, here's your chance to warn the rest of us away. Click over to Motley Fool CAPS now, and sound off.

Fool contributor Rich Smith owns shares of Activision. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 652 out of more than 170,000 members. The Fool has a disclosure policy.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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10/20/2016 4:02 PM
AZN $31.00 Up +0.22 +0.71%
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