I'm always looking for a good deal, whether that means buying an extra box of Lucky Charms when they're on sale, or pouncing on undervalued stocks. The idea that anyone would sell a stock for less than it's worth may seem silly, but legendary value investor Ben Graham tells us, by way of allegory, how we can look out for these situations.
In The Intelligent Investor, Graham introduces readers to a wacky guy named Mr. Market. He drops by each day to offer to sell you interests in businesses he owns, or to buy from you interests in businesses you own. Sometimes, Mr. Market will show up at your door very excited, offering you premium prices for your holdings. At other times, he'll be totally depressed about the future, and will offer to sell you what he has for as low as pennies on the dollar.
To find some of the stocks that Mr. Market is depressed about, I've turned once again to The Motley Fool's CAPS investor community. Each of the companies below had been given a five-star rating (the highest) by our community of more than 65,000 investors just 30 days ago:
|
Stock |
30-day return |
One-year return |
Current CAPS rating |
|---|---|---|---|
|
Knight Capital Group |
(16.8%) |
(31.1%) |
**** |
|
InterDigital |
(14.3%) |
(33.1%) |
**** |
|
Vimicro International |
(11.7%) |
(56.7%) |
**** |
|
Heartland Payment Systems |
(11.3%) |
2.5% |
***** |
|
Varian Medical Systems |
(9.9%) |
(28.9%) |
***** |
|
NovaMed |
(8.3%) |
(45.5%) |
**** |
|
Allied Irish Banks |
(8.2%) |
(5.9%) |
***** |
As the table shows, these stocks are all still very well-regarded by the CAPS community, despite their underperformance over the past month. While these are not formal recommendations, they could be a great place to kick off further research. I'll even get you started with some thoughts on Knight Capital.
If you've ever found yourself thinking to yourself, "Well, I like the investment banks, but I'd like them even more without the actual investment banking," then you may want to check out Knight. The company operates in three divisions: asset management, global markets, and corporate.
The global markets segment is the largest of the three, and made up roughly 70% of the company's 2006 revenue. The segment provides trade execution in domestic and international equities, options, futures, currencies, and fixed-income instruments.
The asset management arm is relatively more profitable than global markets, accounting for nearly 30% of Knight's 2006 pre-tax income. The asset management segment is comprised of a hedge fund subsidiary of Knight, Deephaven Capital Management, which manages more than $4 billion in client assets. The corporate segment includes both the costs of corporate overhead, as well as income from strategic investments outside the company and principal investments in Deephaven's funds.
Recently, it's been Deephaven that has investors worried. In late August, Knight filed an 8-K with the SEC reminding investors of the clawback provision in the Deephaven funds. A clawback allows for hedge fund incentive fees to be returned to investors if the gains on which they were paid are lost. In the case of Deephaven, Knight pointed out that $68.4 million in fees from the first half of the year are at risk if second-half performance -- with the help of recently turbulent markets -- should falter.
Recent action on the CAPS page for Knight has been quiet, but overall the stock has 175 bulls behind it versus just nine bears. Top CAPS player hirshey got bullish on the stock last December and called it a "severely undervalued financial services firm."
So has the recent drop created a good buying opportunity? Or is Knight headed for trouble? Let the community know what you think -- head over to CAPS and share your thoughts. Even if you'd prefer to pass on Knight, you can check out a couple of the other stocks listed above, or any of the 5,000 stocks that are rated on CAPS.
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