"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."
So goes the thesis of my weekly Fool.com column "Get Ready for the Bounce." Therein, I run the 52-week-lows list compiled by Nasdaq.com through the "wisdom-of-crowds" meter that we call Motley Fool CAPS. Out the other end comes a list of stocks that have fallen so far, Foolish investors figure they're just bound to bounce back soon.
But is there a way to cash in on fallen angels who've plummeted even further? Perhaps. If a stock that's fallen for one year straight has headroom, then maybe a stock that's fallen even further, and longer, has room to soar back even higher -- in which case, an apparently left-for-dead stock could offer us a drop-dead gorgeous entry price. We're going to test that thesis today, starting with five stocks that just hit their five-year lows:
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Recent Price
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CAPS Rating
(5 max):
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Allied Irish Banks (NYSE: AIB )
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$4.59
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*****
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The Bank of Ireland (NYSE: IRE )
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$4.07
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****
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MarkWest Energy Partners (NYSE: MWE )
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$8.83
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****
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BreitBurn Energy Partners
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$5.30
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****
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Take-Two Interactive (Nasdaq: TTWO )
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$8.43
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***
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Companies are selected from the "New 5-Year Lows" list published on MSN Money on Thursday. CAPS ratings from Motley Fool CAPS.
Left for dead? Or drop-dead gorgeous?
Each of the stocks listed above has shed between 55% and 95% of its value over the past year, and currently sits at or near its five-year low. Wall Street has left 'em for dead -- but Main Street investors aren't so sure. Four of these five stocks enjoy above-average support among individual investors, and two in particular stand out for their popularity on CAPS, their similar origins, and the steepness of their falls.
I'm speaking, of course, of Allied Irish Banks and The Bank of Ireland, two stocks that have lost 88% and 92% of their values over the past year, respectively. The best-loved of the pair is one we're all familiar with at the Fool, as Allied Irish is already a Motley Fool Global Gains recommendation. For those not yet subscribed to this newsletter, however, a few words may be helpful here:
The bull case for Allied Irish Banks
- CAPS member yzfinance starts us off, writing: "From a value point of view, [Allied Irish] is selling for far less than reported book value even with a fairly big margin of safety. Yes, it has taken hits like a lot of other banks with non-performing loans. Yes, they even cut their dividends, at least until next year. However, they do own a significant portion of M&T Bank (NYSE: MTB ) , enough to cover almost all of their market value. What's the deal with that? If anything, this bank is [run] by management that at least knows the effect of shareholder dilutions, and is diversified enough to survive through this crisis."
- GorillaGorilla added at the beginning of the month that Allied Irish: "has no toxic loans. It has, as is the normal, under performing loans but nothing undue for the sector. The main issue is that the Irish Government is asking for more liquidity. It has around 1.5-2 billion in a US bank which it could sell to get more cash. It has cut it's dividends to 0. ... when Irish economy stabilizes ... I imagine it can hold a higher P/E than 1.15. Not least because the other Irish competitors have shot themselves in the foot; Bank of Ireland say."
- A 1.15 P/E, you say? According to CAPS All-Star mrindependent, that means that not only is Allied Irish: "supposedly well run ... it is very, very cheap. In addition, it seems to enjoy government backing-- a prerequisite in today's financial world."
In fact, in just the few days since mrindependent penned those words, Allied Irish's stock has gone from "very, very cheap" to "ridiculously cheap." The stock sells for -- better sit down for this -- less than the bank earned last year. The P/E sits at an unfathomably low 0.76, the price-to-tangible book value at an equally incredible 0.2 ratio. Allied Irish also continues to earn entirely respectable returns on equity of 20.6% and returns on assets of 1.1% in the trailing-12-month period.
The logical conclusion of all these numbers: Investors don't trust them, and have little faith that Allied Irish will survive the current financial crisis. Whether that means the bank winds up as terminally dead as Bear Stearns or Lehman Bros., or just mostly dead like Fannie Mae (NYSE: FNM ) or Freddie Mac (NYSE: FRE ) , few investors care to wait around to find out.
Time to chime in
Every number I look at tells me that Allied Irish is a screaming buy. Yet GorillaGorilla assures us that we cannot depend on to tide us over until the market agrees with that assessment, and Wall Street bankers -- who should know better than the average investor how good a bet a bank usually is -- are running scared. Add in the fact that over the weekend, the Irish government announced it is injecting capital into the bank, and personally, I haven't a clue which way things are going to go from here.
But maybe you do? If you've got insight into Allied Irish Banks' prospects, then here's your chance to show off. Click on over to CAPS right now, and tell us why AIB's a buy.
Motley Fool CAPS: It's fun, it's free, and it just might make you famous.
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