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.
For perspective on 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 |
1-Year Return |
Current CAPS Rating (out of 5) |
|---|---|---|---|
|
Allis-Chalmers Energy |
(21.2%) |
(47.9%) |
***** |
|
ViroPharma |
(17.2%) |
(39.5%) |
***** |
|
American Oriental Bioengineering |
(16.1%) |
(36.7%) |
***** |
|
Ceradyne |
(10.3%) |
(32.8%) |
***** |
|
Hologic |
(9.8%) |
16.3% |
***** |
|
optionsXpress |
(8.5%) |
(9.0%) |
***** |
|
Chesapeake Energy |
(8.2%) |
20.7% |
***** |
Data from Motley Fool CAPS as of Nov. 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 further research. I'll even get you started with some thoughts on Ceradyne.
Why so blue?
With so many companies boogying through earnings season, posting investor-pleasing earnings beats, it's sobering to remember that earnings misses are still lurking in dark corners.
Case in point: Ceradyne. Thanks to rapidly falling sales for its lightweight ceramic body armor, the company's results continue to plummet. For the third quarter, Ceradyne's revenue dipped 36% from the year-ago period, and its profit dropped by 74%. Profit per share of $0.19 missed analysts' expectations by a hefty $0.09.
Need more reason for pessimism? Well here it comes. The company took this opportunity to cut both its profit and revenue forecasts for 2009. With a new profit-per-share forecast of $0.60, it's hard to get too excited about a forward price-to-earnings ratio of 27 for a company with declining results.
Or is it?
What the bulls say
Ceradyne CEO Joel Moskowitz is certainly bullish on the business. Though 2009 has been a rocky year, he pointed out that future years could provide more opportunity. Specifically, Moskowitz is looking toward lighter weight body armor, body armor for U.S. allies, vehicle armor, and a ramp-up in the company's acquired military helmet operation to drive the company's results in the years ahead.
CAPS All-Star mrindependent is similarly bullish, looking at both the stock's valuation and the longer-term picture for the company:
Ceradyne is selling for 0.75 times book value. Although this company is hard hit by the decline of its body armor business, I think that long term opportunities abound.
But here's the important question: Do you think the recent drop has created a good buying opportunity? Or will a lackluster market for body armor leave Ceradyne defenseless? Head over to CAPS and share your thoughts with the 140,000 members currently part of the community. Even if you'd prefer to pass on Ceradyne, you can check out a couple of the other stocks listed above or any of the 5,300 stocks rated on CAPS.
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