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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:
How Far From 52-Week High?
(out of 5)
|Telecom Argentina (NYSE: TEO )
|Seagate Technology (NYSE: STX )
|Arena Pharmaceuticals (Nasdaq: ARNA )
|OCZ Technology (Nasdaq: OCZ )
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.
Four super falls -- one superball
After a week like last week, in which we saw the S&P 500 notch an impressive 2.2% gain -- more than half a percent per trading day in the abbreviated week -- you might be surprised to learn that anyone managed to lose money. But in fact, according to the folks at finviz.com, some 1,400 separate stocks actually did decline in market cap. And some of them lost a lot of market cap. For example, all four stocks named above exited the week 5% poorer (or worse) than they entered it. So what went wrong?
Beginning at the bottom, OCZ Technology, which makes solid-state memory drives, drove right off a cliff after warning Thursday of a significant revenue shortfall in its most recent quarter. That same day, bullish news out of diet-drug maker Orexigen Therapeutics (Nasdaq: OREX ) (currently awaiting FDA approval of its new Contrave drug), sparked a downgrade to underperform (aka "sell") on rival drugmaker Arena Pharma. The downgrade, from Credit Suisse, cut Arena off at the knees -- and cut short the stock's near-fourfold increase in share price since the beginning of this year.
Another downgrade -- possibly inspired by the OCZ downgrades that preceded it -- hit shares of Seagate. On Thursday, analysts at Needham began worrying that not just OCZ, but the whole darn PC industry was starting to show signs of weakness. This could be bad news for Seagate, which makes hard disk drives for the PC makers.
So far, so logical. But while the sell-offs in these shares make a kind of sense, one stock's weakness appears almost nonsensical. Telecom Argentina sells for all of 3.7 times annual earnings. This four-starred CAPS stock pays a massive 8.2% annual dividend, is expected to grow its earnings at better than 8% per year going forward, and boasts a bank account brimming with more than $500 million cash (against less than $30 million debt). Ordinarily, numbers like these would set value investors to drooling. So why is Telecom Argentina selling off?
Two words for Telecom Argentina
I can answer that in two words: "Cristina Kirchner." As in, Argentine president, and state expropriator-of-corporate-assets extraordinaire Cristina Kirchner. Since taking office in 2007, Ms. Kirchner has gone on a rampage of nationalization, most recently seizing Repsol SA's controlling stake in oil company YPF SA. Last week, Kirchner struck further fear into the heart of value investors when she announced that rather than auction off a packet of 3G spectrum to the highest bidder, she would just plain give away the airwaves to state-controlled telecom Arsat.
The move makes clear Kirchner's plans to favor state-owned companies over private enterprises like Telecom Argentina. It also, incidentally, deprives TA of access to about 20% of Argentina's 3G spectrum, potentially capping the telco's ability to expand its business, and possibly preventing TA from hitting the 8% growth target that Wall Street has set for it.
And a few words for Fools
Even worse, Kirchner has begun making noises about a possible "monopoly" situation in Argentina's telecom industry, with the implication being that she might go further than just favoring Arsat as a way to liberalize the market. She might, potentially, order a breakup of TA, or (given her track record), nationalize TA so as to put the monopoly in the hands of a benevolent government -- rather than the rapacious capitalists who presumably now control it.
Adding to the attraction: When a country like Argentina nationalizes a company, international law requires that it pay "fair" compensation to the owners. Problem is, the very threat of nationalization has knocked down TA's market value to such a low level that "fair" compensation could easily be pennies on the dollar of the company's true worth. This has investors such as the Fool's own TMFCop thinking that "Kirchner will be knocking on [Telecom Argentina's] door soon too, demanding the keys and stealing the company's assets. It's just a matter of time."
The Foolish upshot
In any logical world, in any free market, a company like Telecom Argentina -- with an 8% dividend and an 8% growth rate -- should sell for a P/E ratio of at least 16. In theory, at least, the stock therefore has upside potential of more than 300% at today's prices.
That's a pretty big potential pop. Unfortunately for investors, it will probably take a change of administration in Buenos Aires to make it happen.
Want more Foolish news and views on companies discussed in today's column? You're in luck. We just finished preparing a premium report on Arena Pharmaceuticals. Read it here today.