I am always looking for a good deal, whether that means buying an extra box of Cocoa Puffs when they're on sale or pouncing on undervalued stocks. The idea that anybody would sell a stock for less than its 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. Mr. Market's game is to pay you house calls on a daily basis 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 and offer you premium prices for your holdings, while at other times he'll be inconsolably depressed about the future and will offer to sell you what he has for as low as pennies on the dollar.
So 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 investors just 30 days ago:
|
Stock
|
30-Day Return
|
One-Year Return
|
Current CAPS Rating
|
|
ICO (Nasdaq: ICOC )
|
(29.5%)
|
21.4%
|
*****
|
|
Shengdatech (Nasdaq: SDTH )
|
(25.5%)
|
117.8%
|
*****
|
|
ValueClick (Nasdaq: VCLK )
|
(20.9%)
|
(26.3%)
|
*****
|
|
Alvarion
|
(19.6%)
|
(2.6%)
|
*****
|
|
Logitech International (Nasdaq: LOGI )
|
(18.9%)
|
(4.4%)
|
*****
|
|
MedcoHealth Solutions (NYSE: MHS )
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(18.1%)
|
24.0%
|
*****
|
|
Parker Drilling (NYSE: PKD )
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(15.8%)
|
(25.8%)
|
*****
|
Data from Motley Fool CAPS as of March 4.
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 some further research. I'll even get you started with some thoughts on MedcoHealth.
Why so blue?
Oh how quickly the temperament of Mr. Market turns. Just a few weeks ago the market was celebrating this pharmacy benefit manager's fourth-quarter results. On an adjusted basis, earnings per share were up from the prior year and were $0.02 better than what Wall Street had been expecting. It also raised full-year expectations for 2008 -- and we all know that raising expectations is like catnip for Mr. Market.
The honeymoon couldn't last, though, because the company is hanging in the balance with its mega-customer UnitedHealth Group (NYSE: UNH ) . UnitedHealth currently has a contract with Medco through 2009, but is now mulling over whether it should sign on the dotted line for a two-year extension. Rumor has it that the answer will be a solid "no thanks."
Though UnitedHealth is a relatively low-margin customer for Medco, its business does represent 22% of Medco's revenue and about $0.04 to $0.06 in earnings per share.
What the bulls say
Medco is one well-liked stock on CAPS -- overall it has been rated an outperformer by 495 players, versus just 11 that think it will lag the market. And it doesn't look like the contract chatter is scaring away these bulls, either. On the day that the stock dropped on the contract rumors, CAPS All-Star xthecritic gave Medco the thumbs-up, writing, "Medco went on sale today. Always nice to pick up another green thumb on this thing when it does."
Fellow All-Star ikkyu2 is also bullish on the stock, and thinks that it has the potential to outpace many of its more traditional competitors as the industry shifts. His pitch from last November says it all:
Medco isn't bothered by shrinking revenues due to the secular shrink story of the changeover from branded to generic medicine; they're positioned to benefit from the increased margin on generics, without depending on all that revenue to run 7,000 physical stores. ... There's really no need to wait until the physical-pharmacy model is in the same bin with buggy whips, vacuum tubes and typewriter ribbons, is there?
So do you think the recent drop has created a good buying opportunity? Or is there more downside ahead? Let the community know what you think -- head over to CAPS and share your thoughts with the other 85,000-plus players currently part of the community. Even if you'd prefer to pass on Medco, you can check out a couple of the other stocks listed above or any of the 5,400 stocks that are rated on CAPS.
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