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've got to make sure you catch the haft -- not the blade. That's where Motley Fool CAPS comes in.

It's been awhile, 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:

Company

 

52-Week High

Recent Price

CAPS Rating

(out of 5)

Telecom Argentina (NYSE: TEO  ) $26.90 $14.28 *****
Arcos Dorados Holdings (NYSE: ARCO  ) $29.43 $14.28 *****
Nokia (NYSE: NOK  ) $8.80 $3.15 ***
Research In Motion (Nasdaq: RIMM  ) $45.91 $12.01 *
Best Buy (NYSE: BBY  ) $32.85 $20.82 *

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
After coasting along quite merrily for most of the week, stock markets slipped over the waterfall Friday. The S&P 500 ended the week down 2.5%, the Dow Jones 1.5% -- and every one of the 30 Dow components lost value Friday. And that's the good news.

The bad news is what's happening to the worst dogs of the market. Stocks like the five named up above, each of which crashed to a new 52-week low on Friday. So what went wrong?

In some cases, the answer is obvious. Everyone knows that Amazon.com is eating Best Buy's lunch, for example. (There's even a word for it -- "showrooming.") Similarly, Research In Motion and Nokia are having a very hard time competing with Google and Apple in the smartphone market. Nokia's position got even worse last week when a shareholder class-action lawsuit was filed alleging that Nokia's plan to turn the business around by allying with Microsoft was "fraud."

As for the two South American stocks on this week's list, well, the reason for Arcos Dorados' downfall looks pretty clear-cut. Sales were up strongly, but the tax man took a big bite out of this McDonald's franchisee, and foreign exchange rates didn't help much either. Result: Net profit dropped 28.5%, and the stock fell 16.5%. In contrast, Telecom Argentina reported strong revenues, strong profits, and strong free cash flow. I'll give you three guesses as to which of these five-star stocks I think has the most potential.... Time's up.

The bull case for Telecom Argentina
CAPS member mcintyresa introduces us to Telecom Argentina as the company offering "leading celular operations in Argentina," and with a "very low valuation" to boot.

icymount praises the company's "solid fundamentals" and "no debt." (Actually, Telecom Argentina's balance sheet shows net cash in excess of $600 million.)

dreamjob likes the fact that "FCF and Owner Earnings are growing. ... Revenue and EPS / Earnings are growing very nicely." All in all, dreamjob thinks the stock "looks very cheap right now."

I agree. Priced at just 5.1 times trailing earnings, Telecom Argentina looks value-priced for the 11% long-term growth analysts expect out of it. But actually, even if the company failed to grow at all, this stock would still be worth buying just to capture the 5.9% dividend payout. As dreamjob noted, free cash flow at the company is strong. In fact, while the most recent figures aren't out yet, last year at least, Telecom Argentina actually generated more free cash flow than it reported as net income. (Here's hoping it can keep that up.)

Foolish takeaway
When you get right down to it, based solely on the numbers there's no reason not to want to own Telecom Argentina. The only real reason an investor might be leery of it is the fact that it's located in Argentina (surprise!), where the local president has shown a disturbing propensity for nationalizing companies that strike her fancy.

The good news here is that when asked the question last week, Telecom Argentina CEO Franco Bertone said he personally wasn't expecting any "surprises" from the government, and further stated he hadn't "any indication" that the government might be interested in taking over his company. That's not to say that it couldn't happen, of course -- but at this price, I think the shares are worth the risk. And to put my reputation where my mouth is, that's why I'm recommending a purchase of Telecom Argentina for my CAPS portfolio today.

Want to see how it works out? Click here to follow along.

Fool contributor Rich Smith owns shares of Nokia. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 348 out of more than 180,000 members. The Fool has a disclosure policy. The Motley Fool owns shares of Arcos Dorados Holdings and Best Buy. Motley Fool newsletter services have recommended buying shares of McDonald's, Nokia, and Arcos Dorados Holdings.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

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 May 07, 2012, at 3:00 PM, plange01 wrote:

    its so hard catching the best price on a dropping stock! but in this case rimm is way oversold!a slight change in sentiment could quickly give this one a nice bounce..think i will trade it for about the 50th time in the last two years have not lost yet!

  • Report this Comment On May 07, 2012, at 4:09 PM, chopchop0 wrote:

    Does TEO have the same risk that YPF did/does? I think most investors would think twice about Argentina after the YPF duplicity.

  • Report this Comment On May 14, 2012, at 1:53 PM, durablesmili wrote:

    agree that risk of nationalizatiion like the oil co is entirely what is holding TEO down. That risk is real though and is an unknown imho - makes this somewhat more of a gamble than an investment. (I was a longer term holder of TEO but sold a while back - on sidelines right now).

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