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)

Thompson Creek Metals (NYSE: TC  ) $10.23 $2.84 *****
SUPERVALU (NYSE: SVU  ) $8.93 $2.32 ****
Hewlett-Packard (NYSE: HPQ  ) $36.94 $18.98 ***
Green Mountain Coffee Roasters (Nasdaq: GMCR  ) $115.98 $19.70 **

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
After sliding for four long days, some good news from America's big banks helped salvage the week for the Dow Jones Industrial Average Friday, which ended much as it began, at 12,777. Not everyone enjoyed the big bounce, however. Indeed, each of the four stocks named above traded down to a new 52-week low. But why?

Beginning at the bottom, there's little mystery to Green Mountain's declines. Down 4% on Monday, then 7% more on Tuesday, the stock suffered smaller slips later in the week, before plunging another 7% Friday after analysts at Stifel Nicolaus slashed earnings targets. According to the analysts, Green Mountain's on track to earn as little as $1.64 per share next year, barely half what investors are counting on.

Simultaneously, an earnings warning from printer maker Lexmark erased a (small) rally that had been brewing at Hewlett-Packard. The common denominator here: Hewlett also makes printers and, in fact, depends on printer and ink sales for about 28% of its annual profits. So bad news for Lexmark is probably not great news for Hewlett.

"SUPERVALU?" Apparently not. The supermarket got crushed Wednesday, after confirming that cutthroat competition in the grocery industry will force it to eliminate its dividend and make other drastic (actually, the word they used was "strategic") moves to try and salvage the business. Promises notwithstanding, investors aren't waiting around to see how this story ends. After falling 50% Wednesday, the stock continued to slide all the way until markets mercifully closed for the weekend.

Molybdenum miner Thompson Creek confirmed last week that it will release Q2 earnings on Aug. 9. Instead of waiting for the news to come out, investors sold Thompson down to a new 52-week low. Was that the right call?

The bull case for Thompson Creek Metals
CAPS member XanderHe thinks not: "TC's operating costs have been high due to recent investment in a new mine and due to weak commodity prices. Once the new mine gets up and running, we can expect earnings to increase."

Meanwhile, ace CAPS investor Chemdawg points out that Thompson is "selling for less than 2.5 x the cash in the bank and 1/3 of book value... estimates for the next FY indicate a P/E of less than 6..any way that you slice it, this is just about as cheap as you can imagine this will go."

Indeed, if you ask CAPS member Imhilion, the company's actually selling for "below liquidation value." With share prices this low, how could an investor go wrong buying Thompson Creek?

Here's how
At three times trailing earnings, and six times forward earnings, there's no doubt about it: On the surface, Thompson Creek looks cheap. But it just might be cheap for a reason. For one thing, while technically "profitable," as GAAP accounts for such things, Thompson isn't generating any actual cash from its business. To the contrary, despite "earning" $292 million last year, Thompson's capital investments left the company free cash flow negative to the tune of nearly $500 million.

Partly as a result of this inability to generate cash, the company's also bearing a heaping helping of debt -- $210 million net of cash at last report, on a market cap of less than $485 million. This debt load, combined with Thompson's continued negative free cash flow, persuaded S&P to put the company on "negative" watch for a credit downgrade last week.

A better idea
Fortunately, investors interested in Thompson Creek and its molybdenum operations do have other options to consider. For example, rival miner Freeport-McMoRan (NYSE: FCX  ) is the biggest molybdenum miner on the planet, in addition to being a big producer of both copper and gold. It's not as cheap as Thompson from one perspective -- selling for a trailing P/E of 8.3. On the other hand, Freeport's forward P/E of 6.7 is comparable to Thompson's, and Freeport boasts additional advantages: a less leveraged balance sheet and loads of free cash flow. Perhaps best of all, Freeport pays shareholders a whopping 3.8% annual dividend. (Thompson's dividend yield: zero-point-nothing).

In short, Freeport may not have fallen as far as Thompson, but it may bounce back higher regardless.

Mining stocks aside, what other kinds of companies are poised to profit from a resurgence in American manufacturing? Find out in our new report "3 Stocks To Own For The New Industrial Revolution aka The Future is Made in America."

Fool contributor Rich Smith owns shares of Freeport-McMoRan Copper & Gold. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 338 out of more than 180,000 members. The Fool has a disclosure policy.

The Motley Fool owns shares of Freeport-McMoRan Copper & Gold, SUPERVALU, and Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended buying calls on SUPERVALU. 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 (8)

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 July 16, 2012, at 3:03 PM, techpatriot wrote:

    I do not disagree that FCX is the better company, safer investment, and has a nice dividend. They do have some headwinds however, their best properties are not all located in, shall we say, the most stable countries....

    However, at the current prices, FCX is not a potential 10 bagger and TC is. Yes the Capex numbers are very high, but that is because TC is bringing a new income source, (Mt Milligan mine) online in about 16 months. That is what good mining companies do (although, generally with less debt, hence the current pps). Estimated revenues in 2015 will be near double what the current PPS is now. Could you make more money on FCX than TC in the next 12-16 months? Most likely. In the next 36 months? Not likely.

    Also, not all of their funding has not yet been released from one of their partners, Royal Gold (who has committed over half a billion dollars to this one project themselves, for the right to buy 40% of just the gold stream at a discount).

    This Quarter may or may not be good. But due to CAPEX spending at their two existing up and running mines, I expect much better numbers this quarter, and very good numbers for the last quarter and on into 2013. (As per the company's forward looking statements.)

    As far as Thompson Creek's game changer, the Mt Milligan project, Fools may want to peruse this site for themselves...

    http://www.mtmilligan.com/

    (FYI - per TC as of 6/2012 70% of project capex has been spent or contractually

    committed)

    http://www.thompsoncreekmetals.com/i/pdf/factsheet.pdf

    The new mill at the 75%-owned

    open-pit Endako Mine in northern

    British Columbia was completed

    in March 2012, and is expected

    to increase the mill’s ore processing

    capacity from 31,000 TPD to

    55,000 TPD.

    http://www.thompsoncreekmetals.com/i/pdf/2012-06-06_Presenta...

    Disclosure: I am long TC, do your own DD and remember that the market often misprices a companies shares in the short term and midterm, but not usually for the longterm.

  • Report this Comment On July 17, 2012, at 7:03 AM, tokelau wrote:

    Thank you Rich Smith, for being the first Fool showing some sense of reality regarding TC. Your predecessors kept touting the stock on the way down for at least 70%. I'm glad I didn't take them too seriously.

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