5 Superball Stocks

When stocks fall fast and far, they sometimes set themselves up for remarkable rebounds. The following equities suffered dramatic drops over the past week. With help from the 180,000 members of Motley Fool CAPS, we'll see whether any of them have the potential to bounce back.

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:

Companies

How Far From 52-Week High?

Recent Price

CAPS Rating
(out of 5)

UnitedHealth Group (NYSE: UNH  ) (8%) $55.82 *****
Nike (NYSE: NKE  ) (20%) $91.38 ****
Ford (NYSE: F  ) (33%) $9.50 ****
Veolia Environnement (NYSE: VE  ) (57%) $11.17 ****
Solazyme (Nasdaq: SZYM  ) (54%) $12.77 ***

Companies are selected by screening on finviz.com for abrupt 5% or greater price drops last week. 52-week high and recent price data provided by finviz.com. CAPS ratings from Motley Fool CAPS.

Five super falls -- one superball
Despite yet another miserable jobs report (our third in three months), stock markets ended last week much as they had begun -- off only 0.5% in total. Not every stock was so lucky, though. In fact, nearly 1,200 separate stocks declined in value last week, with literally dozens losing 5% or more of their market cap ... including all five of the stocks named above. So what went wrong?

Beginning at the bottom, we find a quick answer to the question of why Solazyme sank: An analyst at Raymond James pointed out that the stock had already hit his price target, and so he downgraded it. Solazyme shares dutifully sold off, and now sit back below RJ's price target. (Guess who's going to be upgrading Solazyme next?)

Similarly, Veolia got hit with a downgrade Thursday, this time from UBS. Curiously, this was a much more significant ratings switcheroo than Solazyme investors encountered, as UBS dropped Veolia all the way to "sell." Yet Veolia shareholders appear to have dodged a bullet -- the downgrade only cost them 4%.

Rounding out the list, Nike took a tumble post-earnings, while Ford got hit after an earnings warning. Yet even so, the vast majority of the stocks on the list above still enjoy strong investor support on CAPS. Most curious of all, though, is UnitedHealth Group, the sole stock here with the highest CAPS rating -- a perfect five stars.

The bull case for UnitedHealth Group
By all rights, UnitedHealth should still be flying high on news that the Supreme Court upheld Obamacare's requirement that everyone in America buy health insurance by 2014 ... or else. Honestly, it's hard to imagine an outcome that would sound more favorable to a purveyor of health insurance like UnitedHealth.

All-Star CAPS player Munchies101 calls UnitedHealth "the biggest boy" in the health-care insurance business, the company in "the best financial situation" and the one that "can weather almost any storm."

CAPS player Yeti434 predicts UnitedHealth will be "taking full advantage of the increasing volume of patients in the next 10 years."

And CoreAndExplore likes the firm's "high ROE and net margin," its "healthy" debt levels, and especially UnitedHealth's "strong annual earnings growth."

So do I. And it doesn't hurt, of course, that these profits come at an extremely affordable price. Valued at less than 12 times earnings, UnitedHealth looks fairly priced for 10% long-term earnings growth, with a 1.5% dividend yield. And it may even be cheaper than it looks, inasmuch as the company's GAAP financials understate true free cash flow by more than a third. Over the past year, you see, UnitedHealth's reported income came to just $5.2 billion -- but its actual free cash flow was $8.2 billion.

Foolish takeaway
Valued on the free cash it produces, UnitedHealth Group looks less like a "12 P/E stock" to me than it looks like a firm selling for less than seven times free cash flow. A company that, if it were so inclined, could generate enough cash to pay you back your entire initial investment, and leave you owning the business for free... in less than seven years. In other words, a bargain.

Fools, there are a lot of companies that a lot of investors think could skyrocket after the 2012 presidential election (download our free report to read about four such opportunities). Thanks to the Supreme Court decision, UnitedHealth now looks to me like a stock that could skyrocket even before the election.

Fool contributor Rich Smith does not own shares of (or short) any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 359 out of more than 180,000 members. The Fool has a disclosure policy.

The Motley Fool owns shares of Ford and Solazyme. Motley Fool newsletter services have recommended buying shares of UnitedHealth Group, Nike, Ford Motor, and Veolia, as well as creating diagonal call positions in UnitedHealth Group and Nike and creating a synthetic long position in Ford. We 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 (3)

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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 July 22, 2012, at 5:20 PM, crca99 wrote:

    Thx, imagine, I was considering a sell on UNH.

  • Report this Comment On August 23, 2012, at 12:22 AM, MHedgeFundTrader wrote:

    While in Zermatt, Switzerland recently, I took the opportunity to undergo my annual physical. Over the years, I have discovered that American doctors are so paranoid about getting sued that I can never get a straight answer about anything, so I do all of my physicals abroad.

    I like visiting Dr. Christian because he is cut from the same cloth as I. He is a small wiry guy without an ounce of fat, and keeps his hair tied behind in a ponytail. Nothing like treating your patients through example. He has served as the team doctor on several Himalayan expeditions, reaching the incredible altitude of 25,000 feet without oxygen. He includes Mount McKinley and Aconcagua on his resume.

    He gave me the good news: I had blood pressure of 110/70 and a resting pulse rate of 50. This was at an altitude of 5,500 feet, which always elevates one’s blood pressure. The bottom line was that I had the heart of a teenaged Olympic athlete. He told me that whatever I was doing, to keep on doing it. I said that would be strapping on a 60 pound backpack and climbing the 1,500 foot mountain in my backyard every night after work. He answered that would explain everything.

    Dr. Christian usually allocates extra time for patients my age to deliver them bad news. That was unnecessary in my case. So we killed time trading notes on our favorite climbs.

    I also grilled him on the state of the Swiss medical system. He complained that it was going downhill, but was nowhere near as bad as in the US, where his brother practices medicine. Everyone here gets medical care after paying a small premium. His liability insurance was only $3,000 a year, compared to $100,000 in the US. The only malpractice suits in Switzerland are brought by Americans, and they always lose.

    The main reason medical costs were so low is that the people of Switzerland were so much healthier. Walking around the streets here, most people look like they are triathletes. And they do this despite smoking like chimneys. Maybe they are related?

    Life expectancy in Switzerland is 82.2 compared to only 78.2 in the US. And the quality of life at old age is much better. Obesity is rampant at home, but rare in the Alps. Diabetes is unusual in Switzerland, but epidemic in the US. Over 400,000 Americans undergo kidney dialysis in the US, while the treatment is almost unheard of in Europe. This is why the US is spending 12% of GDP on health care, on its way to 17%, while Switzerland is flat lining at 8%, with an older population.

    I thanked Dr. Christian for his advice. The total bill? $200. I headed to the local pharmacy to get a one year supply of my anti-cholesterol drug, which I can buy 90% cheaper than at home. That allows me to keep my total health care costs under $500 a year.

    I then celebrated my good fortune by stepping across the street for a bratwurst and a beer, which my American doctor once banned me from. There, I planned my coming assault on the Matterhorn.

    The Mad Hedge Fund Trader `

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