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)

SandRidge Energy (NYSE: SD  ) (45%) $7.22 *****
ATP Oil & Gas (Nasdaq: ATPG  ) (69%) $6.50 ****
Niska Gas Storage (NYSE: NKA  ) (53%) $9.36 ****
Polypore International (NYSE: PPO  ) (36%) $46.83 ***
AK Steel (NYSE: AKS  ) (50%) $8.79 ***

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

Five super falls -- one superball
After taking a brief breather from its strong run in January, the Dow resumed its upward march last week, ending 1.6% higher than it began. Not everyone's cheering, though. In fact, more than 100 stocks -- including the five named above -- were literally decimated, losing 10% or more of their market cap in just a few short days. So what went wrong?

Steelmaker AK Steel was bouncing along just fine early in the week -- up a little here, down a little there -- until on Thursday it suddenly imploded. Citing fears that AK might need to pay for pension costs by selling shares to raise cash (since it seems incapable of generating cash from selling steel), Bank of America downgraded AK shares to underperform. AK ended the week down nearly 12%.

In other news, filters-maker Polypore got crushed Tuesday. Key customer LG Chem announced it was getting into the battery separator business, and analysts warned LG might not need to buy separators from Polypore anymore. The shares rebounded a bit as traders closed their shorts, and investors began to think the selling had become overdone. Even so, Polypore remained down 16% for the week.

Of course, some of the biggest damage done last week was in the energy sector, and in particular, the natural gas industry. Citing overflowing ("overfloating"?) supplies of natural gas that have accumulated over a long, warm winter, The Wall Street Journal voiced worries Friday that nat-gas prices -- already in the dumps -- might actually turn negative if demand doesn't pick up soon. You read that right: The Journal is saying we could soon see a scenario in which nat-gas companies have to pay people to take gas off their hands.

Scary. And as you can imagine, it's not doing any favors for the stock prices of Niska Gas Storage or ATP Oil & Gas. The report of a quarterly loss (Niska) and a downgrade from Rodman & Renshaw (ATP) didn't help, either.

Even trying to deal with the situation seems to hold some peril. In its continuing effort to raise cash to invest in non-nat-gas projects, SandRidge Energy has already spun off two subsidiaries, SandRidge Mississippian Trust I and SandRidge Permian Trust. Last week, the company put some of this cash to work, buying Dynamic Offshore Resources for $1.3 billion. Wall Street balked at the price, selling off SandRidge by as much as 14%. Yet Foolish investors on CAPS still rate SandRidge the best bargain among last week's heavily sold-off stocks. Why?

The bull case for SandRidge Energy
CAPS All-Star smsheldon keeps the buy-thesis simple: After "4 years of alternative enegy flops, Oil will continue to be King."

Fellow All-Star SilverHawk27 notes that SandRidge has "strong revenue, but a stock price only a fraction of it's value a couple of years ago. With oil prices staying high, this stock is undervalued."

And weinbpa argues that "Tom Ward the CEO is opportunistic and the market does not regard the deals he has done as worthy, but in the end SD will come through."

There's some basis for this hope. As of December 2011, SandRidge proper boasted proved reserves of 471 million barrels of oil equivalent. The Dynamic acquisition will boost that number to 533.5 MMboe. SandRidge calculates that these reserves should be worth about $8.8 billion in total. Yet after last week's sell-off, the stock costs less than $3 billion by market cap. Add in net debt, and its enterprise value is still just $5.4 billion -- implying a 39% discount to fair value.

Foolish takeaway
Now, I wouldn't go taking that discount for granted. There's still the matter of free cash flow to consider -- as in, SandRidge doesn't have any. But the Dynamic purchase will at least move the needle in the right direction. Management notes that Dynamic is generating free cash at the rate of $200 million a year, as compared to SandRidge's own record of $1.3 billion annual cash burn.

Personally, I won't be buying the stock until I see free cash flow turn finally and definitively positive. But for anyone who believes SandRidge will get there, and that the Dynamic acquisition helps move it down the road, last week's 12% decline in stock price makes it a little bit cheaper to make that bet.

Are you a fan of the Fool? Do you like SandRidge but prefer to invest in stocks that both look good on the surface and have "the Fool seal of approval"? Read our new report on the energy sector, and discover what we think is "The Only Energy Stock You'll Ever Need."

Motley Fool newsletter services have recommended buying shares of Polypore International, but Fool contributor Rich Smith does not own shares of (or short) any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 365 out of more than 180,000 members. The Fool has a disclosure policy.

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 (1) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 06, 2012, at 1:02 PM, Teacherman1 wrote:

    Interesting article Rich.

    As far as standing "beneath Mr. Market's silverware drawer", remember, sometimes you can catch a "falling knife" by the handle; if you did your research in advance.

    If I were not already in SD at $5.69, I would be on the sidelines waiting for another drop from today's price.

    I believe it will be up a lot in the long run, even from today's price, but I always prefer a cushion for my long term holds.

    The only way I would buy ATPG is if it fell to under $5.00, and then only a small position as a spec play.

    If everything goes right for them, it could pay off, but they have a real "mountain" to climb, and the slope is very sllippery.

    Just my opinion and worth exactly what I am charging for it.

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