"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 have to make sure you catch the haft -- not the blade. That's where Motley Fool CAPS comes in.
It's been a while, but thanks to last week's sell-off, we once again have a chance to stand beneath Mr. Market's silverware drawer in hopes of snagging a bargain. Let's meet today's contenders.
CAPS Rating (out of 5)
|Platinum Underwriters Holdings (NYSE: PTP )||$46.42||$28.38||*****|
|FormFactor (Nasdaq: FORM )||$11.05||$6.35||*****|
|Brocade Communications (Nasdaq: BRCD )||$7.30||$4.51||****|
|Eastman Kodak (NYSE: EK )||$5.95||$1.24||*|
The week in weak stocks
Last week was a terrific one for most investors, as the Dow Jones Industrial Average (INDEX: ^DJI) continued its 12% tear out of bear-market territory, rising nearly 5% for the week -- but not everyone was so lucky. In fact, more than 900 stocks ended the week in negative territory.
Up above you see four stocks that missed the bounce, instead ending last week near 52-week lows. I've already told you about the lowest-rated stock on the list -- how Eastman Kodak owns powerful patents, but that selling these patents (as it's expected to) would leave a shell of a company behind.
But what about the four- and five-star-rated stocks on the list? What about the stocks investors actually like? Brocade, at four stars, looked like only a middling value when I last checked in on it in June. Today, I like the stock quite a bit more, with its $227 million in trailing free cash flow. Though still not a bargain, Brocade's no worse than fairly priced at 10 times free cash flow and a 10% long-term growth rate.
FormFactor, in contrast, has five-star rating on CAPS, but if you ask me, Fools only love it for its money. FormFactor, you see, is literally made of money. It has more cash in the bank than its own market cap is worth. Problem is, FormFactor has been burning cash for three straight years, going on four. Unless and until that changes, I see the stock continuing to fall as its bank account gets drained dry.
Fortunately, though, we have a second five-star to choose from this week. And if we can judge a book by its cover, this one's a real gem.
The bull case for Platinum Underwriters Holdings
Recommending Platinum Underwriters three years ago, ace CAPS investor MJKpayday called this one "an outperform for me just off the numbers," which included a sterling return on equity of 20% and a price below book value. MJK argued at the time that "no single event is likely to … put the balance sheet in ruins." Unfortunately, MJK didn't tell us what would happen should multiple "events" strike Platinum Underwriters.
P-U! This stinks!
Because as my fellow Fool Rich Duprey told us last week, that's just what happened to Platinum. So far this year, this insurer has had to misfortune to be involved "in just about every catastrophe that occurred, from the New Zealand and Japan earthquakes to Hurricane Irene." This string of unfortunate events has tarnished Platinum's profits and set the stock up for a $5.05-per-share loss for the year. Regardless, I remain optimistic about the stock's chances, and I'll tell you why.
First off, 2011 was a fluke. Up until now, Platinum's financials have shown an unbroken string of (very) profitable years stretching back to 2006. The quality of this business is reflected, too, in its industry-leading "combined ratio" -- the percentage of the premiums it collects that an insurer pays out in claims and expenses, before counting its profits from investing those premiums. At just 86%, Platinum has lately been paying out just $0.86 for every $1 in premiums it collects. (And historically, it's averaged an almost-as-good combined ratio of 90%.) For comparison, Warren Buffett-owned Berkshire Hathaway (NYSE: BRK-B ) was recently clocked at a 92% combined ratio (and often pays out even more than that), while sick man of the insurance industry AIG (NYSE: AIG ) is lucky when it breaks below 100.
What this tells me, Fools, is that Platinum Underwriters isn't a bad company. It's a good company that had a bad year in 2011 -- and it's bound to bounce back as 2011 fades into memory. I'd be a buyer at these prices.