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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 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:

Company

 

52-Week High

Recent Price

CAPS Rating

(out of 5)

Alcoa (NYSE: AA  ) $16.60 $8.30 ****
ArcelorMittal (NYSE: MT  ) $35.31 $13.49 ****
ExactTarget  (NYSE: ET  ) $29.88 $19.30 **
Green Mountain Coffee (Nasdaq: GMCR  ) $115.98 $22.42 **
Netflix (Nasdaq: NFLX  ) $304.79 $62.95 **

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
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.

Foolish takeaway
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.

Fool contributor Rich Smith does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 334 out of more than 180,000 members. The Fool has a disclosure policy.

The Motley Fool owns shares of ArcelorMittal and Netflix. Motley Fool newsletter services have recommended buying shares of Netflix and Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters.

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 (2) | Recommend This Article (12)

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 June 04, 2012, at 2:01 PM, MrSinnister wrote:

    Why not do an in-depth research report on both why Discovery Labs isn't moving and why now is the perfect time to both invest in Biotechs and DSCO? They have been major M&A targets the past Spring, and I don't see that stopping in the near future.

    Received FDA approval for 1 of its drugs, SURFAXIN, and its nebulizer Affectair on March 5th of this year. PPS Spiked at 5.39 until a week later, a secondary offering of 16 million shares @2.80 was submitted, killing the momentum from the FDA approval and leaving it in the doldrums where it sits today, lagging behind companies with only ONE drug and deeply in the red like Seattle Genetics SGEN, currently trading at over 19. DSCO is slated to have it's distribution pipeline for its infant RDS (Respiratory Distress Syndrome) drug out by the end of the year, with EU approval next year. Trading at currently 2.52, this stock could be the steal of the year, and can actually beat Bank of America (before the crises) as comeback stock or Stock of the Year. The volume is currently dismal as longs have rooted into their positions and currently not selling. Check it out and do your own due diligence.

  • Report this Comment On June 04, 2012, at 5:32 PM, newageinvestor wrote:

    You put Nexflix and MT on the list and then didn't discuss them. Why?

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