5 Battered, but Worthy, Stocks

Stocks usually sell off for a reason. Sometimes a stock price declines because the market has efficiently digested new information and appropriately discounted its value. And sometimes a stock price spikes downward because people panic.

As a group, stocks given the maximum rating of five stars by the 115,000-plus-member Motley Fool CAPS community have had a stellar record. But not every five-star stock pans out, and some travel a turbulent road to good performance.

So let's examine some five-star stocks with large price declines over the past month. We'll look at some reasons for the decline to see if these battered stocks are worth their stars.

Here are the past month's battered prospects:

Source: Motley Fool CAPS. Decline from Aug. 25 to Sept. 24.

Note that these are not recommendations to buy or sell, just interesting companies that deserve a look. So let's check out a few of these in further detail.

A rotten market has been unkind to gaming
GigaMedia, the Taiwan-based online gaming software and services company, has taken it on the chin lately, down more than 30% for the past month and 67% from its highs last October. It doesn’t seem to be anything personal. Gaming stocks in general have been crushed this past year with the softening economy and the market sell-off.

The company is the largest sports game operator in China. Second-quarter results showed a 31% revenue gain and a profit increase of 11% year over year. It has a return on equity of 23.9% over the past 12 months, with net cash of more than $49 million. Plus, it’s selling at just over 11 times earnings. Considering all that, it appears to be a cheap stock in a business -- online gaming -- that should have a bright future. GigaMedia has the potential to rocket in a good market, but if the market continues to languish, it appears the stock will, too -- however unfairly.

Repercussions across the pond
Once Europe’s best-performing market, the Irish stock exchange has lately been the continent’s worst, falling more than 60% since July 2007. A problem for the exchange is that it’s overweighted in bank stocks. The Irish economy has enjoyed a housing boom for the last 10 years that has come to an abrupt halt. The economy has gone into reverse. Adding to the misery, Allied Irish Banks' peer, Bank of Ireland, warned of lower profits and cut its dividend. As a result, the bank is selling for about one-third of its price at the beginning of the year.

Normally, I would be inclined to think that there is too much potential trouble for bank stocks in the near term, not to mention uncertainty as to when Europe will turn around. But shares of the Irish bank look soooo cheap. How cheap? The stock recently hit an eight-year low and is selling at 0.6 times its book value. I believe this one will maintain its five-star rating in the near term based on abnormally low valuation.

Capital equipment could lead the market back
At the beginning of this month, capital equipment maker Terex lowered its earnings projections for 2008, and the stock price has since fallen more than 30%. The culprit: slower construction spending in the U.S. and Europe. The stock now trades for a bit less than five times trailing earnings.

Sure, the global economic slowdown will hurt future business. But the stock has paid a dear price already, down to $33.25 from more than $90 in September of 2007. Also worth noting is the fact that capital equipment makers tend get hit the hardest during the onset of a recession or slowdown, and they tend to be one of the first industries to benefit when the economy turns around. Terex, along with other capital equipment companies Deere (NYSE:DE) and Caterpillar (NYSE:CAT), outperformed the S&P 500 during the 2001 recession. I think the CAPS community will probably be patient with Terex and maintain its five-star rating.

Final thoughts
Despite the recent difficulties and share-price declines these companies have experienced, enough CAPS members still rate them as outperformers to give the companies five-star status. Sometimes, great values can be found among the steepest one-month decliners.

Do you agree or disagree? After researching these stocks on Motley Fool CAPS, make a call for out- or underperform. Your choice will help determine whether these companies will continue to rake in the five-star accolades. Come join us on CAPS, absolutely free.