5 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 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.

Company

How Far From 52-Week High?

Recent Price

CAPS Rating (out of 5)

Harris (NYSE: HRS  )

11%

$46.28

*****

Dow Chemical (NYSE: DOW  )

7%

$32.59

*****

Advanced Micro Devices (NYSE: AMD  )

69%

$2.60

**

Molycorp (NYSE: MCP  )

79%

$7.43

**

MannKind (NASDAQ: MNKD  )

23%

$2.39

**

Companies are selected by screening on finviz.com for abrupt 5% or greater price drops last week. Recent price and 52-week-high data provided by finviz.com. CAPS ratings from Motley Fool CAPS.

Five super falls -- one superball
As January morphed into February, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) soared to its highest level in more than five years, passing 14,000 and drawing within a few points of its all-time high.

So happy times are here again, right? Well, not necessarily. And definitely not for shareholders of the more than 2,400 stocks that didn't just fail to hit five-year highs last week -- but lost money instead. Stocks like the five named up above. But what is it, exactly, that's been holding these companies back?

It's not always easy to tell. Take bottom-of-the-lister MannKind, for example. The inventor of inhalable insulin, Afrezza, still doesn't have FDA approval for its product, true. "Earnings" are due out two weeks from now, and no, the company's not expected to report a profit. But that's hardly news. MannKind has never reported a profit. While the company's prospects remain uncertain, they're no more uncertain than they've been in the past, which hardly seems to explain the selloff.

Or consider rare-earths miner Molycorp, making its second appearance on this list in as many weeks. The company's need to issue hundreds of millions of dollars from debt and equity is officially old news today, with no more recent bad news to continue driving the shares down -- yet down they go.

Our third subpar-rated CAPS stock (two stars, just like MannKind and Moly) is Advanced Micro Devices -- AMD to its fans. This one at least seems to be going down for a reason, because last week, bond-rater Fitch put its debt deep into "junk bond" territory with a new rating of "CCC" and warned investors to expect continued losses at the company as the year progresses. Analysts seem to agree -- AMD lost money last quarter, and the quarter before that, and appear set to lose even more money in the current quarter.

But it's not all bad news. This week, we actually have a pair of five-starred CAPS stocks -- Dow and Harris -- dueling for top honors. Which of them is most likely to rebound? Let's find out, as we examine ...

The bull case for Dow Chemical
Endorsed by 94% of the Fools who've rated it so far, Dow Chemical enjoys strong support on CAPS. And why shouldn't it? As EmotionalTrader argues: "Chemicals make the world go round." The Fool's own TMFCane, too, while admitting that "margins are shaky," still thinks "Dow looks like a safe long-term bet."

And I suppose there's good reason to think so. After all, Dow is no spring chicken. The company's has been around since 1897 and has weathered more than a century of economic ups and downs en route to today. The company pays a strong 3.9% dividend yield and, while it's true the P/E ratio is a bit high (the stock sells for north of 46 times earnings, in fact), Dow generates very strong free cash flow. The $1.5 billion in cash profits it reported last year give Dow a 25.5-times-free-cash valuation.

Still, if you ask me, that's quite a lot to be paying for a company that few analysts see growing faster than 7% a year over the next five years. Even with the dividend to support it, I see Dow as about twice overpriced, and unlikely to bounce from these levels.

What about Harris?
So let's move on to our other five-star stock of the day: defense contractor Harris. Here, investors are even more optimistic than they are over Dow, with 96% of Fools rating the company giving Harris the thumbs-up. Ace CAPS member beefangusbeef calls Harris an "amazing company," with "great products, and the most reliable customer in the world." Fellow All-Star investor as10675 loves the stock's dividend yield (currently at 3.2%) and its low valuation (9 times forward earnings).

But what you really have to love about Harris is the cash. While currently unprofitable on a trailing-12-month basis, Harris generated $676 million in positive free cash flow over those same 12 months. That has the stock trading at an enterprise value of just about 10 times free cash -- or a price-to-free cash flow ratio of less than 8.

Are these prices cheap enough to entice you, when Harris' projected growth rate is less than 3%? Perhaps not. But when you consider that the average stock in the defense sector is expected to grow earnings at close to 14% per year over the next five years, you have to wonder whether the 3% rate being assigned to Harris might not be just a wee bit overly pessimistic.

Long story short, if forced to choose between Dow and Harris -- both CAPS favorites, and both rated five stars -- I think the low bar Wall Street is setting for Harris' growth rate, combined with its even lower valuation and strong dividend payout, makes the stock the better bet for a bounce.

Still down around 90% from its highs less than a decade ago, there's been no giant leap for MannKind shareholders. The debate rages over whether the company's revolutionary inhalable insulin will be a complete flop or a massive blockbuster success. In this brand-new premium report on MannKind, we outline every key topic investors have to know with this risky stock. It also comes with a full year of analyst updates to keep you covered as key news develops, so don't miss out -- simply click here now to claim your copy today.


Read/Post Comments (2) | Recommend This Article (3)

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  • Report this Comment On February 04, 2013, at 5:27 PM, WCoastGuynCA wrote:

    In regards to Mannkind the key is trying to time the bottom before it begins the run-up towards the Afrezza submission and eventual decision by the F.D.A.

    86% of drug get approved on their third submission to the F.D.A.

    The major upside with Mannkind is an announcement of a "big pharma" marketing partnership for Afrezza which could occur at any time but is most likely to happen after the results from the current phase three trials are known.

    Interesting months ahead for the Mannkind shareholders.

  • Report this Comment On February 05, 2013, at 12:40 PM, TelsaRowe wrote:

    I believe the pps will play out in 3 equal parts (assuming the outcome all three action dates is favorable)

    Before top line data $5

    Before Pdufa $10

    After approval $15

    I base this on the open interest of strangle/collar plays on the options board for Jan 2014-2015. Looks pretty obvious.

    Any negative information and the company will be priced for Bankruptcy (~$.50) which is why I like the options here because of the huge leverage.

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