"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:
(out of 5)
Green Mountain Coffee
The week in weak stocks
On May 1, 2012, the Dow Jones Industrial Average hit a recent high of 13,379, up 7% from the year's beginning, and with two-thirds of the year ahead of it in which to book more gains. Yeah, so much for that idea.
Last week, the Dow capped a monthlong slide in which it erased every point of gains it had made this year. More than 5,000 stocks lost value over the course of the week, with more than six dozen companies touching their lowest points in the past 12 months. So what went wrong?
Broadly speaking, "Europe" went wrong, as renewed worries over European governments' ability to fix their debt problems spread the contagion of fear across the globe as well as weak domestic jobs reports -- but there were stock specific concerns as well. Take Netflix, for instance. Last week, Bank of America analysts slashed their earnings forecast for the Internet movie purveyor, warning that costs of international expansion, combined with weak trends in U.S. streaming, could derail profit hopes at the company. The downgrade sparked an immediate 6% decline in the stock's price, or about three times as bad as the broader market experienced.
At Green Mountain, it was confirmed that the SEC is continuing its 18-month-long investigation into the integrity of the company's accounting procedures. This reignited worries that when Green Mountain's lawyer stated earlier this year that he had no indication that the SEC was planning to take action against the company "in any way, shape or form," he may have spoken too soon.
Meanwhile, ExactTarget continues to fall short of the mark. The company's CEO appeared on Jim Cramer's Mad Money a couple weeks back, talking up his stock's fortunes, and extoling ET's ability to grow revenues in a lousy market. But talk is cheap, while ExactTarget, with no profits and a price-to-sales ratio of more than 5.6, isn't.
Unsurprisingly, these three poor-performing stocks continue to receive low marks from CAPS investors. But what about the two four-starred stocks on our list? Is there value to be found here?
Buy Alcoa or ArcelorMittal?
Many Fools believe there is. In fact, CAPS investor D3BETA thinks Arcelor is so cheap the stock will simply explode just as soon as Europe stabilizes a bit. After all, as mhonarvarthe2nd points out, the stock's "priced for negative growth" right now. Anything remotely positive could be the catalyst that sets Arcelor off.
Meanwhile, WhichStocksWork argues that "increased demand from the automotive and aerospace industries for aluminum will be a great boost for Alcoa." And All-Star CAPS investor buffalonate thinks Alcoa "is a great bargain right now," especially if the company delivers on its promise to "double its revenues over the next 10 years."
But which stock is the better value? For me, it's not even a question. Sure, four-starred Alcoa and four-starred ArcelorMittal are similar in several respects. Both make metal. Both pay dividends, sell for low-20s P/E ratios, and carry sizable debt loads. What sets them apart, though, is that one of these companies has a cash flow statement showing it has a chance of pay down its debt, increase its earnings, and grow its dividends -- while the other isn't.
Presently, Alcoa devotes only a third of its annual profits to dividend payments, while Arcelor is maxed out with a 125% payout ratio on its dividend. Arcelor faces further pressure in the fact that it's currently burning cash at the rate of $1.5 billion a year (even as it claims to be GAAP profitable), while Alcoa is generating $840 million in positive free cash flow annually -- more than twice what it reports as net earnings.
Alcoa may not be our exact favorite stock to invest in this year (to find out who is, read our free report, appropriately titled "The Motley Fool's Top Stock for 2012"). But at a valuation of just over 10 times free cash flow, and a long-term growth rate of better than 13%, Alcoa certainly looks like a bargain. ArcelorMittal? Not so much.