"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've got 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)
|Chesapeake Energy (NYSE: CHK )||$35.75||$17.72||*****|
|InterDigital (Nasdaq: IDCC )||$82.50||$27.33||****|
|CARBO Ceramics (NYSE: CRR )||$183.34||$83.18||****|
|Emergent BioSolutions (NYSE: EBS )||$26.41||$14.46||****|
|Allscripts Healthcare (Nasdaq: MDRX )||$21.92||$10.30||***|
The week in weak stocks
After a weak start, the Dow Jones Industrial Average finished strong on Friday, closing up 1.5% on the week -- but not everyone was so lucky. Up above, you see the names of five companies that hit new 52-week lows on Friday. So what went wrong?
In some cases, the answer was obvious: Chesapeake's self-inflicted wound -- in the form of the CEO it has, and an incentive program that has raised concerns over conflicts of interest -- has cost Chesapeake shareholders a lot of money over the past year. (Record-low natural gas prices are the primary culprit, however.)
InterDigital's crushing earnings miss Thursday pretty much explained that stock's decline as well, as did the miss at CARBO Ceramics (incidentally, a victim of the same lack of interest in new gas drilling that's hurting Chesapeake.) Meanwhile, Emergent BioSolutions hasn't reported its earnings just yet. Those aren't due out till Thursday -- but the pre-earnings slide in stock price suggests that Wall Street may be worried. Yet judging from the four- and five-star ratings of these stocks, it would appear ordinary Main Street investors are more than happy to rush in and buy when Wall Street sells. Is that prudent?
Honestly, I'm not sure it is. True, all of these stocks are "profitable," as GAAP accounting standards account for such things. Problem is, with the possible exception of CARBO -- which hasn't released its cash flow information yet -- these stocks are all deeply in the red from an actual cash-profits perspective. Every one of them reported negative free cash flow over the past year.
Well, every one of them but one ...
The bull case for Allscripts Healthcare
Among the five stocks in my chart, Allscripts stands out for exhibiting the single largest drop in share price last week (37%), and also arguably the worse news report. Despite growing revenues 9% year over year, Allscripts saw profits slashed in half. As if that weren't bad enough, the earnings snafu sparked a veritable coup in the corporate offices, as first the company CFO, and then three members of its board of directors, were all given the boot.
Reactions to the news were swift and furious, typified by this exclamation from CNBC's Jim Cramer: "I say sell, sell, sell. I feel there's nothing there and I don't want you to touch it."
To which I can only respond: Really, Jim? Literally "nothing?" What about the fact that, despite all the bad news, Allscripts still grew revenues last quarter, bringing trailing-12-month revenues to $1.5 billion (which was 60% better than what it reported in 2010)? Or that it generated $225 million in free cash flow (which was more than three times reported net income, and twice what it made in 2010)? Or the fact that at $10.30 per share, Allscripts now sells for a share price of just 1.3 times book value (less than 80% of the average P/S ratio in its industry)?
Don't these facts count for anything?
There's no denying Allscripts' news was bad. It's arguable it was among the worst news items reported by any company on Wall Street last week. It's likely we'll see consensus analyst estimates come down a bit from their lofty levels of 21% expected long-term profits growth, as a result. Still, Allscripts' new and improved valuation of just 9 times annual cash profits suggests there's still a lot of value to be found in this stock.
Make no mistake: Management must move quickly to fix its boardroom debacle and get new people in place to right the ship. But Jim Cramer is wrong. There is a ship here, and it's loaded with cash-generating potential. Soon as the crew situation gets worked out, Allscripts should be ready to set sail.
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