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"Fool me once, shame on you. Fool me twice ... If you fool me, you can't fool me again." –George W. Bush
Like our 43rd President, the market doesn't like to get fooled. Once a stock loses investor confidence, it can be hard for it to make a turnaround, and the market often leaves stocks for naught simply because of a bad quarter or temporary financing issues. Investors are notorious for overvaluing short-term news as the swings in share price following earnings illustrate. One quarter does not a stock make, after all.
String together three or four disappointing press releases and the market all but considers you an outcast, even if these events don't necessarily have long-term consequences. When stocks fall 80% or 90%, there is sometimes an opportunity awaiting savvy investors, especially when market value falls below book value. Let's take a look at three beaten-down stocks that could rise from the ashes.
Up Thompson Creek without a paddle
2012 has led a number of molybdenum miners down a dark hole as commodity prices have sunk. Prices for molybdenum, a common ingredient in steel, crashed after the financial crisis and, following a mild recovery, have sunk to new 52-week lows at $12.74/pound. Shares of General Moly and Freeport-McMoran have dropped about 20% and 30%, respectively, since February 1, but no one has been hit harder than Thompson Creek Metals (NYSE: TC ) , which is down about 60% this year. Thompson Creek currently produces only molybdenum and cannot make a profit when prices are that low. Analysts are predicting an $0.08 EPS loss for its second quarter.
But there's more to the puzzle than that. Thompson Creek is building a third mine, Mt. Milligan in Canada, which has fast turned into a money pit while under construction. In early May, the company issued $200 million in debt along with another financing arrangement for future shares to help fund the mine construction, causing the stock to tumble more than 20%. Without positive cash flow from its molybdenum production, concern has built around the company's ability to finish building Mt. Milligan, which has further suppressed the stock price.
At this point, the company's book value is nearly four times its market cap. Its fixed assets are about double all liabilities before the recent debt offering. Even with the financing, the stock is still selling for less than liquidation value. Unless molybdenum prices never recover, this is still a solid business, and with the copper and gold from Mt. Milligan, it should be even more valuable. The upside potential here is huge.
This is some primo stuff
Primo Water (Nasdaq: PRMW ) , maker of exchangeable water containers, has had a rough go of it over the last year. The company has missed earnings and scaled back guidance during that time, and it has also had delays in the rollout of FlavorStation, its SodaStream (Nasdaq: SODA ) knockoff. What was once one of the market's growth darlings has turned into an outcast, dropping from a price in the teens all the way down to just around $1.50 today.
But like Thompson Creek, this isn't a broken company, just one that's had hiccups on its way to becoming a healthy business. Profitability has taken longer than expected, but the company appears to be on its way, having reversed a compressing gross margin trend and growing revenue by an expected 38% this year. FlavorStation adds another promising revenue stream. Though Primo is only projecting $15 million to $17 million in revenue from the at-home soda-maker, growth in that area figures to be strong. By comparison, rival SodaStream continues to buck concerns that it's a fad and is expected to grow sales by 32% this year to nearly $400 million.
After the stock crash, the company's price-to-book value is just 0.26 with a market cap of just $36 million. While much of that book value is intangible assets, its net tangible assets are still greater than its market value. This is a young company still growing at a fast pace. Any measurable profits should send shares up sharply.
Not just a Spanish bank
Unlike the two stocks above, this next company is not only consistently profitable but also pays a fat dividend. Banco Santander (NYSE: SAN ) has gotten caught up in the mess that is the Spanish economy and the European Debt Crisis, but it's stronger than it looks. Like Telefonica (NYSE: TEF ) , the bank makes more than three-quarters of its profits from markets outside of Spain, and just 28% of its loans are made to customers in its home country.
In the past year, the Spanish bank has lost more than half its market value, dropping from as high as $11.50 to $5.50. The stock seems to have a hit a rough bottom, recovering from its June low with the help of the Spanish bank bailout. Though there have been concerns that the government would also need emergency funding, Germany's finance minister Wolfgang Schaeuble said just recently, "There is absolutely no reason to speculate about comprehensive aid program for Spain. It really doesn't need that." The worst could soon be over for the Iberian country.
The Spanish bank now has a price-to-book value of 0.57, a forward P/E of 6.4, and a dividend yield of 10.6%. Be on the lookout for an easing in Spanish 10-year bond rates. If those fall back under 6%, a sign that investors believe Spain is becoming a safer investment, Banco Santander should climb with it.
Calling the bottom on a stock is always risky business, but there are things investors can look for. Molybdenum prices will help guide Thompson Creek, as well as any updates on the Mt. Milligan mine. Primo Water needs to deliver on its next earnings report, due out August 6. Analysts are expecting a loss of $0.04 per share, so any profits would be especially rewarding. And finally, Banco Santander should improve on any positive macro signs out of Europe.
Value investors may have noticed that bank stocks are incredibly cheap these days, and they're not the only ones. Investors like Warren Buffett and John Paulson have taken notice as well. Buffett himself even said that given the choice, he would certainly be buying in this sector. Fortunately, for you the individual investor, many of these stocks are too small for the big-time hedge funds to make meaningful investments. Our experts have selected a few small banks in this sector that look like great value plays. Find out which ones in our special free report: "The Stocks The Smartest Investors Are Buying." You can get your free copy right now. All you have to do is click right here.