It's no secret that the stock market's advances from its lows of March 2003 to its recent highs of this year have been a boon to those who were invested throughout the rally. But what's an investor to do with money that can be put to work today? Sitting on cash is a valid option, but for those who are itching to put some money to work, I think following the 52-week low list is a good place to start your search for value.
A warning
I feel it's appropriate to offer a warning up front. Most of the companies that appear on the low list do so for a good reason: They're in trouble. When looking through the list, always make sure to identify why a company is cheap and if the situation is permanent or temporary. If you don't feel confident that the trouble is temporary, move on.
A historical example
With the bad stuff out of the way, let's look at the bright side of the low list. Almost all companies will appear on the low list at one time or another -- including companies that are viewed as expensive growth stocks. Generally, this will be during a period of malaise for the economy as a whole or for an industry. Starbucks (NASDAQ:SBUX) is a good example of this. Currently, Starbucks is making new highs on a fairly regular basis, but there have been times when Starbucks has made new 52-week lows for a month or more at a time. The most recent occurrence was from August to Oct. 2001, and this dip offered investors shares of Starbucks at prices consistently below those of a year earlier and not seen since.
More recently, Krispy Kreme Doughnuts (NYSE:KKD) has been flirting with its 52-week low as well. It pays to check the low list often, because you never know what will show up next.
What to look for
After determining that the trouble weighing on a company is temporary, check the balance sheet for debt. Preferably, you want to find none of it, but at a minimum you want a company that generates more than enough cash to cover the required payments on interest and principal. To check on the cash-generating prowess of your target, turn to the cash flow statement and look for the line that says "income from operations." Match that number to the debt for the next year and you have a good idea of whether the company can meet its obligations. The last item is perhaps the toughest, but it is strongly recommended: Try to figure out if the company has a chance at growing again once the trouble is behind it. If all these requirements are met, you have a good candidate on your hands and one worthy of a more thorough evaluation.
All the theory and stuff is great, but let's put it into practice by having a look at two recent examples that passed the test.
A different kind of cable company
SureWest Communications (NASDAQ:SURW) is not only the local phone company for certain towns and cities in the Sacramento, Calif., area, but also a wireless service provider, a broadband provider, and a cable TV provider. Until a few years ago, the company was focused on the local telephone business in the area, but in 2002, it began offering a "triple play" package, which offers customers telephone, cable, and broadband service in one bundled package. In 18 months, the number of "triple play" homes subscribing has grown from 5,000 to more than 11,000, and the company can market the service to another 35,000 homes. In addition, SureWest is expanding its network in the area. To top it all off, the stock has a dividend yield over 3%.
While the above sounds great, almost all companies are on the low list for a reason, and SureWest is no exception. It has taken on a fair amount of debt to support this expansion and has to compete with a couple of heavyweights that have deeper pockets: SBC Communications (NYSE:SBC) and Comcast (NASDAQ:CMCSA). Look beyond the debt, though, and you see a company that is generating tons of cash. The debt will still need to be paid, but there should be plenty of cash left over for dividends, share repurchases, and other activities that create value for shareholders.
A broken IPO
As a general rule, I pay very little attention to the IPO market, as I believe IPOs offer little to individual investors. However, on occasion, an IPO comes out of the gates and falters a bit. Callidus Software (NASDAQ:CALD) is a recent IPO issue that has earned its spot on the low list by announcing a few weeks ago that it would miss first-quarter earnings targets. As is prone to happen with small companies in the software industry, Callidus could not close a couple of orders before the quarter ended.
The more interesting part of the press release is buried toward the bottom, where Callidus notes that it expects to end the first quarter with $75 million in cash. For a small company, this is usually a substantial amount, and a quick glance at the recent annual report reveals it to be just over $3 per share. At a current stock price of around $8, cash backs up almost 40% of Callidus' market cap. In addition, two research firms have recently identified the company as having the strongest solution in the niche market of incentive management, and the company boasts some big-name customers to prove it.
By regularly watching the low list, you are sure to find opportunities that are as good or better than the two listed here. Keep your eyes open, though, because you never know when a star is going to fall.
Krispy Kreme was just one of the choices in Motley Fool Stock Advisor. What other stocks have David and Tom Gardner recommended to subscribers? You can check it out risk-free for six months.
Fool contributor Nathan Parmelee owns shares in Starbucks, but none of the other companies mentioned. The Motley Fool is investors writing for investors.
