It's Not Too Late to Buy These Cheap Stocks

This article is part of our Rising Star Portfolios series.

It's been just shy of a year since the launch of The Motley Fool's Rising Star Portfolios, and my value-investing Messed-Up Expectations approach is doing just about what you'd expect in a tough market environment. The past few months have been especially difficult, but I've been doing what any long-term investor should be doing -- buying shares of beaten-up companies.

Today, I'm going to bring the positions of three companies back up to a 2% position of investable funds, given that the Fool has decided to continue funding this portfolio. The great thing for me and this portfolio is that all the share prices are near or below the price at which I originally purchased them.

Company Purchased Recent Share Price Current Expectations*
SUPERVALU (NYSE: SVU  ) 2/1/11 @ $7.30 $7.66 (25.9%) / (13%) / 0%
Hertz Global (NYSE: HTZ  ) 4/21/11 @ $17.18 $10.59 (0.9%) / (0.5%) / 0%
Dendreon (Nasdaq: DNDN  ) 8/11/11 @ $10.15 $9.00 NM

*Expectations are the growth rates for one to five years / six to 10 years / 10 years from trailing free cash flow needed to justify the recent price using a discount rate of 15% in a DCF model. NM = not meaningful.

The thesis for SUPERVALU involved a big disconnect between what the equity market and the debt market were expecting. That hasn't changed, given current expectations. Further, the company was in the midst of a turnaround, going from "terrible" to "merely bad." That has continued, with further repayment of debt (from $7.33 billion when I bought to $6.69 billion most recently) while at the same time seeing declining same-store sales but improving costs. In an environment where even Wal-Mart Stores (NYSE: WMT  ) is having difficulty with same-store sales, it's nice to see that this investment thesis is still intact. I'll be adding enough money to this position to bring it back up to the 2% level.

Hertz's thesis, too, is still intact. This includes growing sales and net income as well as improving fundamentals like residual value (so that its used cars can be sold at higher prices) and declining days sales outstanding. The equipment-rental side of the business is doing well, also, with more equipment being rented at higher prices. Hertz is also now the only major bidder for Dollar Thrifty (NYSE: DTG  ) , with Avis Budget Group (Nasdaq: CAR  ) having dropped out. That should give Hertz a nice boost to growth. With shares down substantially from when I purchased them, little change to the priced-in expectations, and a still-intact thesis, I'm comfortable bringing this back up to a full, but small, position.

Finally, the situation at Dendreon is slowly improving. This stock was purchased after the market's strongly negative reaction to sharply reduced Provenge sales guidance came out. Dendreon has since made several steps toward improving the situation, including cutting its workforce to reduce costs and educating prescribing physicians better on Medicare reimbursement. Reimbursement time is now down to 30 days, and one physician reported reimbursement within eight days. Plus, worries about competition from Johnson & Johnson's (NYSE: JNJ  ) Zytiga are abating, as that is currently only being used in third- and fourth-stage cancers, which is not where Provenge is used. These are good things to see, and they demonstrate that management is getting a handle on this situation to turn it around. Thus, I have no problem adding more money to this investment, bringing it back up to a full 2% position.

Come and discuss these and other investments on my Messed-Up Expectations discussion board, or follow me on Twitter.

If even Wal-Mart is seeing spotty same-store sales growth, what retailers might make good investments, then? Get a special free report that reveals the names of two cash kings banking on the changing face of retail.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

Fool analyst Jim Mueller owns shares of Johnson & Johnson and has an option position on Dendreon. He's an analyst for the Motley Fool Stock Advisor newsletter service. The Motley Fool owns shares of Johnson & Johnson, SUPERVALU, Hertz, Wal-Mart, and Dendreon. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson and Wal-Mart Stores, buying calls in SUPERVALU, and creating diagonal call positions in Johnson & Johnson and Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool's disclosure policy is never messed up.


Read/Post Comments (3) | Recommend This Article (8)

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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 October 14, 2011, at 6:42 AM, BSDetector wrote:

    Interesting to say the least. All I've read for the past six weeks were MF articles on Dendreon explaining how worthless the company was because NOBODY was interested in the therapy.

    Funny how groups change their story after they've had time to acquire shares. Honestly I would be embarrassed to host an investment related business online that operated in such a fashion. The good news is: You're Not Alone.

    Ethics & morality in business these days is just so....old school.

  • Report this Comment On October 14, 2011, at 8:09 AM, TMFGebinr wrote:

    Hi BSD,

    While I appreciate your comments, I think you misunderstand us and our Motley culture. Each writer and analyst is encouraged to do their own thinking, rather than toe a company line. There is no line to toe. Those writers on our site who don't like Dendreon write that. Those who do, write that. Each presents their arguments. As investors, we believe we make the best decisions when we hear and consider both sides. For more, see this concept of Motley explained in more detail at http://wiki.fool.com/Motley.

    Thanks for reading and caring enough to write.

    Cheers,

    Jim

  • Report this Comment On October 14, 2011, at 1:17 PM, TruffelPig wrote:

    I like Dendreon - the problems with their product should be solved and it is a great stock then. I also like the MF culture.

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