3 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 170,000 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)

BP Prudhoe Bay Royalty Trust (NYSE: BPT  ) (28%) $88.33 ****
First Solar (Nasdaq: FSLR  ) (81%) $19.99 **
Rambus (Nasdaq: RMBS  ) (77%) $4.28 *

Companies are selected by screening on finviz.com for abrupt 10% or greater price drops last week. Data on 52-week highs and recent price provided by finviz.com. CAPS ratings from Motley Fool CAPS.

Five super falls and one superball
The Dow Jones Industrial Average only slipped about 0.5% last week -- not a big loss, but it sure did turn a lot of stocks into losers. In all, more than 3,500 separate equities exited the week worse than they went into it. Many were decimated, losing 10% or more of their value in just five short days -- all three of the names listed above included. So what went wrong?

Beginning at the bottom, Rambus continues to suffer the unpleasant aftereffects of last year's patent litigation loss to Micron (NYSE: MU  ) . A couple of weeks ago, the memory chip maker announced that in an effort to stem the incessant flow of losses, it will be forced to make some pretty drastic restructuring moves, reorganizing its business, laying off 15% of its workforce, and recording $6 million in severance charges over the next couple of quarters. None of this sounds particularly optimistic for the company's future, and investors are voting with their feet -- by heading for the exits.

In other tech news, First Solar announced last week that it's stopping deliveries to its 397 MW "Agua Caliente" solar-power project in Arizona, putting the stock in real hot water with investors. The worry here is that First Solar may have been channel stuffing -- shipping more thin-film solar-power modules to its project than it should have been, according to the project's timeline -- and that it did this in order to mask a global lack of demand for the modules.

Meanwhile, BP Prudhoe Bay Royalty Trust sold off as much as 30% at one point last week before bouncing back to end with "only" a 19% loss. That sounds bad, but in fact, BP Prudhoe Bay has had not just a bad week; it's pretty much having a terrible 2012. Indeed, as far back as June, Forbes was warning that the stock was "crowded with sellers." Investors may wonder, then, why the stock is still rated four-stars on CAPS -- and whether it's a bargain.

The bull case for BP Prudhoe Bay Royalty Trust
On CAPS, member DanCooper76 thinks it is a bargain, arguing that "the stock will benefit from forces pushing oil higher."

jdmorgan23 predicts that "steady returns and supply will keep this stock outperforming for the long term."

Meanwhile, MJ60 adds that "Prudhoe Bay has more oil than originally thought. Should pay nicely for quite a few years."

But although this sounds good, MJ60 puts his finger on the real reason Prudhoe's stock is slumping: While it's entirely possible that Prudhoe will keep paying out its beefy 10.5% dividend yield for "quite a few years," in the end, its days are undeniably numbered.

Last week, you see, The Wall Street Journal ran a report warning investors away from oil "royalty trusts" like Prudhoe. The reason:

These instruments, which collect and distribute income from oil and gas or mining properties ... have no employees or physical assets, and most will cease to exist in 20 years or less. Their only value consists in the income they distribute. But their future payouts may well be a ghost of the yields that appear so attractive to today's investors.

Finite oil and numbered days
In short, when you buy a share of Prudhoe, what you're buying is the proceeds from the oil in wells it controls. Unlike true oil companies like BP (NYSE: BP  ) proper -- i.e., dynamic operations that discover oil, pump it out, and then move on to find more oil -- a royalty trust has a fixed amount of oil at stake. Once that oil is gone, so is your "company."

And according to the Journal, investors today are overpaying for the assets of this finite company. As the paper reports, Prudhoe itself says the "current value of their future cash available for distributions was $1.4 billion ... yet this week the total market value of BP Prudhoe stood at $2.3 billion." That suggestion that Prudhoe is worth 40% less than what it's selling for goes about three-quarters of the way towards explaining the stock's 30% selloff last week.

Foolish takeaway
Of course, the wild card here is future oil prices. If they bounce back, the stock would likewise bounce. This possibility, I suspect, is the reason Prudhoe rebounded quickly from last week's sell-off. It's also the reason Prudhoe shares are higher today --and might go higher still.

Do you agree with The Wall Street Journal? Do you think "oil trusts" are for dinosaurs and solar power is the fuel of the future? Then you might want to take a second look at First Solar instead. Read our premium research report on First Solar and find out if this stock is for you.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 252 out of more than 180,000 members. The Fool has a disclosure policy. 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 (6)

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  • Report this Comment On September 05, 2012, at 11:54 PM, addisonsm wrote:

    The problem with the analysis done on BPT is that it doesn't match reality. The trust receives 16% of payments on the first 90,000 barrels per day. The most recent assessment is that the field will provide oil in excess of this amount for the next 25 years, and then will start to decline in volume. The payment amounts assume that oil will remain at the current price and that inflation will not cause the dollar denominated oil to rise in price. Assuming that you reduce the dividend payment by the value of the investment over the 25 years ($3.60 per year at current levels), then there is a $6 dividend NBT. That is paid every year or at least the next 25 years and then reducing from that point until the trust is required to sell the field and distribute the remaining assets. It assumes that there is no change in technology over the next 25 years to extend the production life of the field. Probably most important here, is that the analysis done of BPT's situation assumes that it is just like all of the other royalty trusts, which it is not. Whether people buy it or not is of little concern to me because eventually, this security will have a value of zero. That is the nature of the trust and everyone should know it going into it. I bought it originally at $86 when it wasn't pumping the requisite 90,000 barrels per day. I bought it at $105, $92, $76, $79 and $82, but I bought it because of the overall financial picture. I'm not trading it and it meets the income needs that my situation has, but I bought it understanding that there was a 25 year life to the field, all the other assumptions aside. I also believe that the dollar will continue to devalue and oil will rise to counter the inflationary effect. I believe that technology will figure out a way to extend the life of the field and that will be a bonus. I look at the energy policy of America (okay that is an attempt at humor) and I am confident that the price of oil will rise as a response to demand. And I get my share of 16% of that number as price per barrel increases. This isn't a growth stock like Apple or Google and it certainly isn't one of the many royalty trusts that suffer from the problems that the WSJ is concerned about. It is one of many securities that fit my needs, but if someone is going to "analyze" BPT, at least get the complete facts and use them to analyze the security rather than painting BPT with the broad royalty trust brush. It makes the WSJ, not BPT, look bad. Over priced? Sure, but so is every high paying dividend security on the market. Seriously, AEP at $43? When interest rates start to rise everything will drop propotionate to the dividend they pay and the growth that supports the dividend.

  • Report this Comment On September 06, 2012, at 10:36 AM, Forestcutter wrote:

    Well stated!

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