These Beaten-Down Stocks Could Be Done

It's been one of the best quarters in a long time, with all indexes closing out the first three months of 2012 in solidly positive territory. Many stocks are up, but some have fallen markedly from where they were just a year ago. Does that mean it's time to bail out? That depends on whether or not the business backing that stock is sound, or if it's just treading water while competitors gain. If you find stocks like the three I've found today, you might want to ask yourself if the risk is really worth the reward. I don't think it is, and I'd like to tell you why.

Diamonds in the rough
While the broader market's been up over the past year, the stocks I sought out had fallen by at least 30% in that time frame. Two of the companies I chose were in the red, and the other is highly valued:

Source: Finviz.com and Yahoo! Finance. NM = not meaningful due to negative earnings.

Doing the austerity shuffle
Ah, Greece. This one was almost too easy. Unless you've been living under a rock for the past few years, you're well aware of the horrible situation facing Greece and its banks. By some measures, Greece's national bank is quite cheap, with one of the lowest price-to-book ratios in the Eurozone. But there's also little indication that European leaders and the ECB have done anything other than kick the can down the road.

Sure, short-term traders might be able to make a bit on the stock's volatility. The National Bank of Greece had almost doubled when I called it a dead-cat bounce in mid-February. Since then, it's fallen 23%. In the same time, Bank of America, one of the more distressed American banks, has risen 15%. I should have given this Greek bank a red thumb in CAPS last month, but I'll make up for that mistake by initiating one today.

Leap into red ink
Quick, can you name the last time Leap Wireless had a profitable year? It was way back in 2005, and even that year only brought in net income of $30 million. Since then, losses have widened, free cash flow has been consistently poor, and unlike larger competitors AT&T (NYSE: T) and Verizon, there's no dividend to make up for a lack of gains.

LEAP Net Income data by YCharts

Barring the 2005 spike, Leap's been moribund for a decade. Analysts don't expect that to turn around, as they've slapped the company with an abysmal negative 28% growth rate over the next five years. AT&T's stumble in its pursuit of T-Mobile might have opened the gate a little for Leap to add spectrum. There's also talk of a buyout, which might be shareholders' last, best hope to see any gains on their investment. If that happens, I'll eat crow -- but I don't think this debt-ridden also-ran is the best option for spectrum-starved telecoms, and the T-Mobile smackdown doesn't set a good precedent for future consolidating moves from the Big Two.

Mummy's curse
Diamonds are a girl's best friend, but Blue Nile hasn't been kind to her portfolio lately. Last year's third-quarter results were disappointing, and expenses began to outpace revenue. Its CEO resigned unexpectedly. The jewelry industry seems to be in a funk, but Blue Nile's advantage, its online first-mover position, hasn't shielded it. In fact, that online cachet may be what's dooming its stock price now:

NILE Revenues TTM data by YCharts

Blue Nile's never been cheap valuation-wise, but as you can see, investors have begun to tire of watching the company's top line grow without associated bottom-line benefits. My Foolish colleague Sean Williams makes an excellent case for avoiding this stock, focusing on increased commodity costs and Blue Nile's exposure to the fluctuations in diamond prices as reasons to avoid it. The company carries an earnings multiple over three times as costly as Signet Jewelers and twice as expensive as high-end jeweler Tiffany. Does it deserve to be so dearly valued just because of its online presence? I don't think so.

Foolish final thoughts
I've given each of these companies an underperform call in CAPS, and I'll be watching their progress to see how my assessments bear out. You might not agree -- indeed, I expect it -- but I hope I've offered a reasonable explanation of my positions that you can incorporate into your investing thesis. Interested in low-priced stocks but don't want to fall into a value trap? Take a look at The Motley Fool's newest free report on the banking sector, featuring the stocks only the smartest investors are buying. In it, you'll find some stable banks that are much better investments than the National Bank of Greece, including one Warren Buffet would want in his portfolio. Find out more -- click here to claim your free report now.