"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:
|Spartan Stores (Nasdaq: SPTN )||$19.24||$15.17||****|
|Visteon (NYSE: VC )||$58.59||$28.42||***|
|Netflix (Nasdaq: NFLX )||$247.85||$53.91||**|
|Zynga (Nasdaq: ZNGA )||$15.91||$2.72||*|
The week in weak stocks
Last week the Dow Jones Industrial Average fell for four straight days, laying many stocks low, before finally ending on Friday with an employment-report-inspired bounce -- lifting stocks back off their lows. Yet even so, more than a dozen companies failed to bounce back fast enough to dodge the "52-week-low" label , including all four named above. Why?
In the case of Zynga, the answer's obvious. Still reeling from its massive, earnings-inspired 40% share price decline of a couple of weeks ago, Zynga got sucker punched by rival Electronic Arts on Friday, when the latter accused Zynga of stealing its idea for a Sims Social game when developing the Zynga offering The Ville; 42 million players have already signed up for The Ville, but EA's lawsuit threatens to derail the new game just as it's getting traction -- and just when Zynga could really use the business.
In contrast, Netflix's troubles seem more limited, and owe to a report out of Procera Networks that argues Olympics coverage on TV and the Internet has siphoned away 25% of Netflix's streaming traffic. That sounds reasonable, but also temporary. Of greater concern to Netflix shareholders should be the fact that even after losing 76% of their value, the shares still cost more than 30 times earnings, and could have further to fall.
The situation with Visteon is more complicated. On the one hand, the auto parts maker beat earnings Thursday, turning in $1.40 per share in profit, versus an expected $0.79. On the other hand(s), much of the profit came in the form of one-time gains, revenue declined 17%, and management lowered guidance for the year. Visteon counts both Ford and General Motors (NYSE: GM ) among its key customers, and depends on both for its sales. Unfortunately, the big two are struggling to sell cars right now. GM's sales dropped 6% in July, Ford's 4%. GM in particular warns that weak sales at its European operations will produce "substantial losses" through the end of this year. That's not good news for Visteon.
The bull case for Spartan Stores
So where does that leave us? With only one on our list that's still scoring an above-average four-star rating on CAPS. This particular diamond in the rough goes by the name of Spartan Stores, and if you've never heard of it, that's not surprising.
Spartan operates primarily in Indiana and Michigan, where it has two main businesses: running a chain of 96 retail supermarkets and 27 gas station convenience stores, and also distributing groceries to 375 other independent grocers. The company reported earnings last week, growing sales modestly, earning less profit as a whole, but buying back enough shares to give it an uptick in earnings per share -- $0.27 versus $0.26 last year.
That's not exactly barn burner growth, but CAPS investors seem to think it's not bad enough to justify selling the stock down to a 52-week low. While few CAPS members have posted about the company in recent months, on the whole, opinions seem bullish, with about 93% of Fools agreeing with past predictions that Spartan will succeed in remodeling its stores to attract a higher income demographic (CAPS All-Star gokylego), and perhaps eventually spread to the entire Midwest (member eakcora).
Can Spartan bounce back?
I'm not super-enthused myself, but still, these investors have a point. At less than 11 times earnings, Spartan shares hardly look expensive. Most analysts agree the company will be able to grow its profits at least 10% per year over the next five years -- perhaps more. The average growth rate in this industry is, after all, projected at 16%.
Factor in a tidy 2% dividend yield, and I'd say Spartan is modestly undervalued already today. And if it gets anywhere near the 16% growth its peers are aid to be expecting, it could indeed bounce. Then again, a lot of bricks-and-mortar retailers are struggling. Find out which stores are likely to suffer going forward, and which ones profit, in our new report on The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail.