If a company's stock is trading at rock-bottom prices, there's usually a valid reason why it's tanking. That said, it's important to remember that the market has a tendency to panic in a sell-off, pushing share prices well below their true value. Which can present some potentially golden opportunities for savvy investors -- as long as they're not afraid to take on the risk.
Here's the thing about beaten-down stocks -- odds are, most of the bad news has already been priced in to them. Meaning one more negative item probably isn't going to have much of an impact -- but an unexpected bit of good news could send the stock soaring.
Then again, not every bargain-basement stock is necessarily a bargain. So how can you limit your downside risk?
See how much cash a company generates. A relatively high amount ensures that the company will at least be able to pay its operating expenses over the near term, and that diminishes some of the danger around it ...
For each company mentioned below, we'll express the levered free cash flow as a percentage of market cap. Levered Free Cash Flow (LFCF) measures the amount of cash left over after all interesting payments have been made. The higher the value, the more cash the company has.
Here's a list of oversold stocks with enough of a cash cushion to keep up with operating costs. Considering the possibility that most of the bad news is already priced into these names, are these stocks being underestimated? (Click here to access free, interactive tools to analyze these ideas.)
1. Brookfield Homes Corp
Key Stats: Trailing-12-month levered free cash flow at $79.33M, which represents about 23.2% of the company's total market cap of $341.88M.
Key Stats: Trailing-12-month levered free cash flow at $187.64M, which represents about 21.09% of the company's total market cap of $889.92M.
3. Scholastic Corporation
Key Stats: Trailing-12-month levered free cash flow at $163.75M, which represents about 19.75% of the company's total market cap of $829.08M.
4. PAETEC Holding Corp
Key Stats: Trailing-12-month levered free cash flow at $73.09M, which represents about 15.44% of the company's total market cap of $473.29M.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.