I am always looking for a good deal, whether that means buying an extra box of Golden Grahams 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 (no relation to the cereal) tells us, by way of allegory, how we can look out for these situations.
In The Intelligent Investor, Graham introduces readers to a wacky chap 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 |
|---|---|---|---|
|
Schlumberger |
(28.2%) |
(46.2%) |
***** |
|
Western Union |
(26.5%) |
(29.2%) |
***** |
|
Manitowoc |
(24%) |
(77.3%) |
**** |
|
Nuance Communications |
(19.4%) |
(52.3%) |
**** |
|
Hologic |
(18.6%) |
(59.1%) |
***** |
|
Gerdau |
(17%) |
(49.8%) |
***** |
|
Linear Technology |
(16.2%) |
(24.8%) |
***** |
Data from Motley Fool CAPS as of Nov. 5.
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 Western Union.
Why so blue?
It's earnings season, so we can bet that most big drops have something to do with an earnings release -- and this is certainly the case with Western Union.
Current results weren't all that disappointing. Though earnings per share missed analysts' estimates by a penny, revenue was up 10% from the prior year and net income was up 11%. The company has also been hard at work using cash to buy back shares. It repurchased a whopping $523 million of shares during the quarter, and still has around $1 billion authorized for further share buybacks.
Permeating the earnings release, though, were signs that growth may be flagging. Management adjusted its earnings per share range for the full year, bringing down the top end from $1.33 to $1.31. Previously, management had expected the year to come in toward the top end of that higher guidance. Probably even more disappointing to investors, though, was the withdrawal of its long-term growth objectives of 10% to 12% revenue growth and 15% to 18% earnings-per-share growth.
What the bulls say
We can start here with the valuation. Western Union may not be among the stocks that have been beaten all the way down to a single digit P/E multiple, but at the midpoint of management's new earnings guidance it's trading at about 12 times 2008 earnings per share. If the company is able to grow anywhere near its previous earnings growth objective, that would be a pretty attractive valuation.
Getting away from the income statement, in this environment there's a lot to be said for a company that generates as much cash from operations as Western Union does. For the 12 months ended in September, the company has raked in over $1 billion in operating cash flow. And though it does have $3 billion of debt on its balance sheet, it also has $1 billion in cash and has its interest expense well covered.
On CAPS there are nearly 1,000 members bullish on Western Union versus just 31 who are bearish, giving the stock its perfect five-star rating. Back in mid-2007, CAPS All-Star LiLNipsFatal rated the stock an outperformer and chimed in with his bullish thoughts:
Western Union is best in class in the money transfer market and they hold many sustainable competitive advantages over its competitors. The company's possesses an unrivaled network of 295,000 agents, which allows it to benefit from the network effect, as each additional agent makes using Western Union that much more convenient for customers. The Western Union brand is the most recognized in the industry, which is important when consumers entrust the company with their hard-earned cash.
So do you think the recent drop has created a good buying opportunity? Or will Western Union continue to get dragged down by the weak economy? Let the community know what you think -- head over to CAPS and share your thoughts with the other 120,000-plus players currently part of the community. Even if you'd prefer to pass on Western Union, 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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