"Don't catch a falling knife," as the old saw commands. (Pardon my mixing a cutlery metaphor.) The idea of buying a former superstar stock at a discount price certainly has its attractions, but you've got to make sure you catch the haft -- not the blade. That's where Motley Fool CAPS comes in.
Today, we once again stand beneath Mr. Market's silverware drawer, measuring which knives have fallen the farthest. Then we'll call on CAPS to ask which of these stocks -- if any -- Foolish investors believe are ready for a rebound. Let's meet today's list of contenders, drawn from the latest "52-Week Lows" list at WSJ.com:
|
Company |
52-Week High |
Recent Price |
(out of 5) |
|---|---|---|---|
|
Healthways |
$19.50 |
$11.35 |
**** |
|
Satyam Computer |
$6.68 |
$3.96 |
*** |
|
Vical |
$4.17 |
$2.24 |
*** |
Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Friday last week. 52-week high, recent price, and CAPS ratings from Motley Fool CAPS.
One out of three ain't bad
The problem with seeking underperformers in a market that's outperforming is that ... well, to be perfectly blunt, the pickings are slim. This week, our choices whittle down to:
- Biotech shop Vical -- still sinking under the weight of the previous week's disappointing drug test results.
- Satyam Computer received a boot in the backside after reporting a $28 million loss for fiscal 2010.
- And finally, "disease care" manager Healthways.
Of the three, only Healthways breaks from the pack with an above-average four-star rating on CAPS -- as well it should. For despite scraping along the bottom of a 52-week low, the stock has encountered little bad news of late. A couple weeks back, FBR Capital recommended buying the shares based on a positive outlook for pharmacy benefits managers. (Express Scripts
Judging from CAPS members' optimism, that news shouldn't be enough to dent the bull thesis on Healthways. But do you agree?
The bull cash for Healthways
For those not familiar with Healthways, CAPS member NetscribeHealthC introduced us to the company back in 2007 as a provider of "disease management, complex case management and chronic care management to health plans, governments, employers, and hospitals in all 50 states, the District of Columbia, Puerto Rico and Guam. It offers programs that identify and provide care to individuals at high risk for incurring substantial health care costs in the near future."
HowMer has suggested that Healthways' programs "makes the current US health insurance system more profitable by encouraging the use of known algorithms to treat chronic illness. Goal is decreasing insurance claims because of patient compliance with treatment."
And CAPS All-Star EddieWG07 wrote in last year to confide: "I'm in this industry and I think [Healthways] is one of the leading players in the space. No matter what anyone says, health care management presents a huge opportunity and any company that captures even a small piece of this pie will outperform."
Admittedly, Healthways has had its difficulties getting its hands on said pie. Profit fell off a cliff last year (although profit margins over the last four quarters are superior to those of UnitedHealth
Still, at today's price the shares appear to offer a pretty attractive valuation -- 10.6 times earnings, and barely 6.5 times free cash flow. (It's also worth pointing out that, whatever its problems, the company has generated positive free cash flow year in and year out, through the depths of the Great Recession.)
Foolish final thought
Healthways carries a sizeable slug of debt, of course -- big enough to raise its enterprise value-to-free cash flow ratio up to about 10.5, roughly in line with P/E. Still, if the company succeeds in reaching Wall Street's consensus growth rate of 11.6% annually over the next five years, the stock price seems to offer a decent margin of safety today.
But is a good price alone enough to make Healthways's stock bounce back? You tell me. Click over to Motley Fool CAPS now, and tell us if you think Healthways is ready for a U-turn.
