"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 the recent 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:
|NTT DoCoMo (NYSE: DCM )||$19.55||$15.83||*****|
|China Unicom (NYSE: CHU )||$22.50||$14.22||****|
|China Telecom (NYSE: CHA )||$67.97||$46.07||***|
|Ctrip.com (Nasdaq: CTRP )||$47.54||$18.36||***|
|Yanzhou Coal Mining (NYSE: YZC )||$41.89||$16.01||**|
The week in weak stocks
It didn't always feel like it, but last week actually worked out pretty well for investors, with the Dow booking a 0.7% gain, and the broader S&P 500 tacking on 1.8%. Not everyone was so lucky, however. Fears of slowing growth trends in China, for example, sent many companies tumbling to their lowest prices in a year. So what went wrong?
The Wall Street Journal reported Friday that Chinese steel production is running 10% above the country's "prior peak output." But with demand for this steel weakening, companies like Yanzhou Coal Mining, which provides coal for steel smelting, could face a profits crunch. Coming on the heels of last quarter's 11.5% decline in earnings, that would not be good news for shareholders.
Weak earnings were also the tale at Ctrip.com, which reported fiscal Q1 results earlier this month. While revenues grew nicely, Ctrip was utterly unable to turn these improved sales into greater profits, and its earnings plunged 25%.
Mobile phone companies China Unicom and China Telecom probably should have performed better. The former is coming off a quarter in which earnings surged nearly 600% (albeit on a per-share basis this worked out to a fraction of a penny turning into a penny-and-a-fraction). The latter just got a really big upgrade from Credit Suisse, which went from "underperform" to "outperform" in the blink of an eye, citing an uptick in profitable 3G cell usage in China.
Regardless, Foolish investors believe an even better opportunity lies across the China Sea in Japan, where Japanese wireless telco NTT DoCoMo is growing sales, growing earnings, and scoring a full five stars on CAPS. But is it truly the stock with the best chance to bounce? Let's find out.
The bull case for NTT DoCoMo
CAPS All-Star Staka calls DoCoMo a "defensive blue chip, paying a dividend," and a "steady earner," and likes the fact that unlike certain other telcos (such as a couple of big names in the U.S. I could mention), DoCoMo manages to do business without carrying debt on its books. To the contrary, the company's bank account is flush with $8 billion in net cash.
CAPS member nibs61 calls DoCoMo "cheap" at just 11 times earnings. In fact, if you value the company on the cash it produces -- and not just the earnings it reports -- DoCoMo is even cheaper than it looks. Free cash flow for the past year came to $7.6 billion, versus $5.6 billion in reported income under GAAP.
This works out to a price-to-free cash flow ratio of just 8.5 on the stock (and it's even cheaper than that once you net out the cash). Not bad for a 7.7% grower paying a 4.8% dividend. And not incidentally, DoCoMo is cheaper than either China Telecom or China Unicom, which also helps explain why DoCoMo gets five stars from investors on CAPS, versus the three- and four-star ratings accorded to China Telecom and China Unicom, respectively.
Are there other, faster growing, sexier ways to play the rapid global growth of smartphones? Sure there are, and if that's the kind of thing you like to invest in, then you should take a quick look at our report on 3 Hidden Winners of the iPhone, iPad, and Android Revolution. However, prudent investors can take comfort in NTT DoCoMo's low price, high dividend, and ample cash reserves, and know that this is one of the safer telecom investments out there today.