The market is not a perfect value-weighing machine. Sometimes, stocks trade at dirt-cheap or sky-high valuations for good reason. In other cases, there's a plot twist just around the corner and Mr. Market never sees it coming.
Today, I'll take a look at three incredibly cheap stocks and figure out whether their low valuations are reasonable or unfair. The companies under the lens for examination are Fitbit (NYSE:FIT), First Solar (NASDAQ:FSLR), and Macy's (NYSE:M).
Fitbit has lost a step
Fitbit shares have plunged a massive 57% lower in 52 weeks, including a 30% drop in a single day triggered by weak fourth-quarter guidance.
The stock is trading at just 14 times trailing earnings and 19% over Fitbit's book value. About 42% of all shares were sold short a month ago, as if investors are waiting for the other shoe to drop -- hard.
So is this a dramatic overreaction that could lead to a soaring bounce, or is Fitbit in serious trouble?
In the latest earnings call, Fitbit CFO Bill Zarella admitted that consumer demand for the company's health-monitor tools is softer than expected. The company is a leader in a once-promising market, but the market opportunity is turning out to be smaller than Fitbit thought.
In other words, today's step counters and pulse trackers might just be a fad without staying power. It's quite possible that a real market for these features won't emerge until the hardware can be found as a freebie in your next cereal box, or thrown in as a no-cost bonus in another product. If so, there's no real value to be found in fitness trackers -- at least none that will stick around for the long haul.
Fitbit's strongest asset is its solid balance sheet. Backing out $3 of cash per share, the stock would actually be trading at just 3.9 times trailing earnings. Armed with $672 million in cash and short-term investments but no long-term debt at all, the company has a few years' worth of financial support that lets management take risks and try drastic strategy shifts in order to relight the growth fires.
Personally, I would hardly back up the truck to the Fitbit window. A small, speculative investment might be appropriate because the company might be able to find new markets. I could also be wrong about the faddish nature of fitness trackers.
But one-hit wonders never catch a second wind, and I wouldn't be surprised to see Fitbit falling into that wistful category. If Fitbit is a bargain, it's a terribly risky one. Keep your buys small, and be fully prepared to lose it all. This is a gamble, not an investment.
First Solar is waiting for a moment in the sun
Like Fitbit, First Solar has seen share prices crashing in recent months. The stock has plunged 43% lower in 52 weeks. Also like Fitbit, this stock is objectively cheap -- First Solar trades at just seven times trailing earnings, or 2.7 if you back out $20 of net cash per share from the share price. Furthermore, both companies used to sport rambunctious sales growth figures, but have slowed down considerably in recent years.
But that's where the similarities end.
Rather than a potential fad, First Solar works in a field of explosive growth opportunities. Solar production and installation costs have fallen 90% in a decade, making the technology a serious alternative to oil, coal, and natural gas. First Solar's stalled sales growth will continue in 2017, or maybe even turn negative for a variety of political and operational reasons. But the long-term value here is undeniable, and First Solar is a proven leader in this industry.
Solar stocks in general are primed for a rebound today -- and First Solar more so than most.
Yes, this is a genuine bargain. You can quote me on that.
Macy's bricks-and-mortar mess
Retail veteran Macy's can't quite match First Solar's or Fitbit's extreme one-year market drops, but share prices have indeed plunged 55% lower in about 18 months. The fall of 2015 was not kind to Macy's investors.
Mind you, 2016 really should have roughed the stock up even further. Here's why:
Macy's has seen its revenue sliding south over the last four quarters, which wouldn't be a huge problem if profit margin was on the rise. Instead, the store chain's profitability is plunging. Management recently closed down 100 locations, even in profitable markets. Same-store sales fell over the holidays. There isn't much good to say about Macy's these days. Like most of its bricks-and-mortar peers, the retailer is fighting for its life against online retailers led by Amazon.com (NASDAQ:AMZN).
This company does seem open to trying new ideas, such as the Backstage discount-store-within-a-store concept or the smaller-sized BlueMercury beauty outlets. But the age of big-box retailers is drawing to a close, and none of these admirable moves will do much to delay the inevitable.
Macy's had better embrace the online retail market wholeheartedly, before it's too late. A handful of old-line department stores will make it, but most will die defending the outdated business models they hold too dear to kill.
Sadly, Macy's seems destined for the great outlet store in the sky unless management makes some drastic attitude changes. Management still insists that the in-store experience always will form an effective weapon against online sellers. The company's financial reports don't even break out online sales so they can be discussed or analyzed.
It's not too late to turn the sinking ship around, but it'd be an unlikely and difficult turnaround battle -- and Macy's isn't even thinking about the core problem in the right terms yet. Until further notice, then, Macy's low share price is more of a falling knife than an inviting bargain.