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 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 in these stocks, 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:

Company

52-Week High

Recent Price

CAPS Rating (out of 5)

SK Telecom (NYSE: SKM  ) $20.29 $13.18 *****
Cellcom Israel (NYSE: CEL  ) $34.00 $15.51 ****
France Telecom (NYSE: FTE  ) $23.70 $15.01 ****
Zynga (Nasdaq: ZNGA  ) $11.50 $8.81 *

Companies selected from the list of stocks hitting new intraday 52-week lows as reported on finviz.com. Recent price and 52-week high provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

The week in weak stocks
The year started out with a bang for stock investors, as the Dow Jones Industrial Average gained a good 200 points in its first few days of trading and ended its first week up a respectable 1.2%. Not all investors were so lucky, however. What went wrong with these four stocks, for example?

Let's begin at the bottom. Recent IPO Zynga is having a rough time of things in the new year. It's now down an even 20% from its opening stock price on IPO day three weeks ago, despite the fact that IPO lead underwriter Morgan Stanley doubled down on its initial investment in the company and now boasts of owning a 16% stake in Zynga. Judging from the stock's one-star rating on CAPS, few Fools are feeling envious of Morgan's new prize.

In contrast, we're seeing a lot of enthusiasm on CAPS for foreign telecoms. Each of SK Telecom (South Korea), Cellcom Israel, and France Telecom scores high in the estimation of CAPS members ... even as their stocks scrape along at 52-week-low levels. Could this be a buying opportunity?

The bull case for SK Telecom
A lot of Fools seem to think so, and their favorite stock of the three is South Korean mobile telco SK Telecom -- which, as CAPS All-Star ServusDei7 points out, is "selling at P/E = 6 and 52 week low." Our CAPS member adds: "Risky bet but could be a 10 bagger."

Fellow All-Star kevday agrees that SK offers a "great valuation" and is "willing to take a chance on Korea" (and its unstable northern neighbor) in hopes of snagging a great deal.

I agree. While there's certainly an element of ... well, excitement in investing in South Korea right now, the valuation here is really quite attractive. Not only does SK Telecom sell for 7 times earnings, but it also pays shareholders a tidy 6.8% dividend yield (according to S&P Capital IQ). That's quite a bit more than the 1.2% yield currently quoted by Yahoo! Finance, for example, and it suggests that many investors may be unaware of how truly cheap these shares are.

To put these numbers in context, here in the U.S., shares of AT&T (NYSE: T  ) cost 15 times earnings. AT&T's projected growth rate is also less than half that of SK (3.3% versus 7.9%). And as you'd expect with a low stock price, the dividend yield on SK stock is also superior to AT&T's (6.8% versus 5.9%).

An even better bargain, though, is tiny Cellcom Israel. Here we're looking at a stock that costs less than 6 times earnings but is growing even faster than SK. Cellcom also pays an amazing 12.5% dividend yield (again, quoting S&P Capital IQ). And while I certainly understand investors' reluctance to invest in companies with military threats so close to their borders, it seems to me that Cellcom stock in particular goes out of its way to compensate investors for the risks they are taking.

Foolish takeaway
Now, none of this is to say that international telcos are per se better bargains than American options. While I like the prices at Cellcom and SK Telecom, I'm not at all enthusiastic about France Telecom. Ten times earnings and a 12% dividend yield may look appealing to some investors, sure. But with France Telecom located in an economically iffy section of the globe, pegged for less than 1% annualized earnings growth over the next five years, and in hock up to its ears (net debt at FT is a whopping $40 billion), there are better places for your money. Namely: Cellcom and SK Telecom.

And to show you just how convinced I am of the buy thesis on these two telcos, I'm going to publicly pledge my troth to these recommendations. Right now, I'm heading over to Motley Fool CAPS to rate both Cellcom and SK Telecom as "outperformers." Follow along, and feel free to jeer loudly if I turn out to be wrong.

Planning to add more great dividend stocks to your portfolio? You're in luck. Our Foolish analyst team has just cooked up a baker's dozen of delicious dividend doughnuts for you, fresh from the oven. Read about them -- for free! -- in "13 High-Yielding Stocks to Buy Today."

Fool contributor Rich Smith owns no shares of (nor is he short) any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 321 out of more than 180,000 members.

Motley Fool newsletter services have recommended buying shares of France Telecom and Cellcom Israel. 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 Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (5)

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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 January 12, 2012, at 1:37 PM, popeye2012 wrote:

    Don’t be fooled by the dividend at CEL. Make sure to do the research and learn what the company is facing in the upcoming months.

    The new business environment for the Israeli Telecom industry makes it almost impossible to be profitable as before…

    Before the new regulations Israeli telecom companies enjoyed a huge profit margin ( ~20% ) the government declared a war against the ceullar cartel and the new reforms will bring the profitability to ~3%-5%.

    Read the last CC…. revenus dropped in 40% and thats before the competition even began.

    Amos Shapira – Cellcom’s former CEO and one of the best CEO’s in Israel resigned – even he understands that the huge profit days are over and its best to retire on top before the ship sinks….

    Be aware that on March 2012 two new companies will join the competition (Golan Telecom & Mirs)

    and they will offer new 4g networks and cellular plans at 50% discount.

    Every Israeli knows that a smartphone with a 3g/Wifi allows to make FREE calls (with Viber/Skype) and FREE SMS (with Whatsapp).

    In my humble opinion CEL will drop below $8 within the next year.

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