Get Ready for the Bounce

"Don't catch a falling knife," as the old saw commands. (Pardon my mixing in 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)

Baker Hughes (NYSE: BHI  ) $81.00 $39.25 ****
Alpha Natural Resources (NYSE: ANR  ) $47.25 $9.32 ****
Arch Coal (NYSE: ACI  ) $28.76 $6.10 ****
NII Holdings (Nasdaq: NIHD  ) $44.00 $11.30 ***
AU Optronics (NYSE: AUO  ) $7.80 $3.68 ***

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
The Dow Jones Industrial Average tacked on a respectable 0.75% Friday, capping its best-performing week of the year. And yet, as most stocks rebounded, many stocks didn't. Up above you see five of the unlucky ones: five stocks currently plumbing 52-week lows. Will any of them bounce?

Perhaps. At AU Optronics, for example, things are looking grim. The high-tech contract manufacturer is up to its hips in debt -- well over $5 billion net of cash, at last count. It's burning cash like crazy, it's GAAP-unprofitable, and it's unlikely to break even for at least another year.

In contrast, NII Holdings sports a hefty debt load of its own, but it is profitable (from a GAAP perspective, at least) and growing smartly. Wall Street analysts have NII pegged for 18% long-term earnings growth, and investors were recently cheered by a spate of insider buying. One corporate officer and two members of the board of directors have made a combined $322,000 worth of stock purchases over the past month. That's a pretty sizeable bet on the company, and made by the people who know NII best.

Granted, both these stocks sport only mediocre three-star ratings on CAPS. So let's move up a level and look at the more optimistically rated four-stars. Here, two stocks stand out for their focus on the beleaguered coal industry. Lowballed by natural-gas prices, King Coal is having a hard time finding a market (at a profit) for its goods. As a result, Alpha Natural is currently operating at a loss, and it's expected to keep losing money for at least another year. Arch isn't doing much better, either. While sporting an attractive P/E ratio of 14 today, weak profit forecasts have the stock trading at 305 times what it's expected to earn next year. That's hardly encouraging.

And then there's Baker Hughes.

The bull case for Baker Hughes
Priced under 10 times earnings and less than nine times what it's expected to earn next year, Baker -- an oil-field services company -- looks much more promising than its coal-focused cousins. Long-term growth estimates are strong, with 21% annualized growth projected on the Street, and Baker also pays a modest 1.5% dividend yield.

CAPS member doesnotcare calls Baker a "solid energy company," while marshgator says it combines "high expertise with limited competitive players in a growth industry" (which Baker itself made happen when it bought key competitor BJ Services back in 2009).

All-Star investor buffalonate believes "we will eventually figure out how to use all of our cheap natural gas which will bring prices up. When the prices normalize the need for drilling rigs will go back to a more normal level," which will improve profits at Baker Hughes. In the meantime, Wade32ru argues that patient investors should go bargain shopping: "All oil and gas service names are pretty cheap right now. Fwd PE is 9.6 - that's cheap for a company that is growing revs at an impressive clip."

A Foolish caveat
All of this sounds pretty convincing -- and tallies well with earnings growth projections on Wall Street. The thing that worries me about Baker, though, isn't that it's not earning enough today; to the contrary, last year's $1.7 billion in net profits made 2011 Baker's second-most-profitable year ever, next to the $2.4 billion earned in the heady "peak oil" days of 2006. No, what worries me here is that historically, Baker has done a poor job of holding onto its profits and translating them into cash. Free cash flow for the past 12 months amounted to negative $1.3 billion, and Baker hasn't had a year in which FCF matched reported income, much less exceeded it, in nearly a decade.

Now, if reported earnings are all you care about, that may not be a problem. You may be willing to take Baker at face value -- it certainly looks cheap enough. If, on the other hand, you're like me and prefer to see cash in hand before handing over your own cash, you may want to leave Baker Hughes alone and look elsewhere for oil opportunities -- in which case, here are three ideas to get you started in our new Fool report on three stocks for $100 oil.

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. 324 out of more than 180,000 members. The Fool has a disclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (0) | 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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1908911, ~/Articles/ArticleHandler.aspx, 12/18/2014 9:30:15 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement