"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.
It's been awhile, but thanks to last week's sell-off, we once again have a chance to stand beneath Mr. Market's silverware drawer in hopes of snagging a bargain. Let's meet today's contenders:
(out of 5)
Advanced Micro Devices
Research In Motion
The week in weak stocks
Research In Motion suffered a double whammy last week, announcing a delay in introduction of its new BB10 operating system (to next year), and a patent lawsuit loss to Mformation Technologies, which will cost it $147 million. Unprofitable and with cash flow on the wane, RIM is running out of time to turn things around.
Some folks think Advanced Micro Devices is in the same boat. Sales were down in last week's earnings report, and guidance came in weak as well. On the plus side, free cash flow at the firm is strong and growing. With $340 million generated over the past year, and a market cap only nine times that number, AMD may not be as bad a bargain as it appears. Two-star rating or no, this one is worth watching.
For similar reasons, you might not want to write off two-starred Travelzoo just yet. On the one hand, yes, investors sold the stock off by 5% last week, and another 4% so far today. On the other hand... this new price leaves Travelzoo looking more attractive than ever. Strong free cash flow has this one trading for a P/FCF ratio of less than 11 (and it's even cheaper once you net out the cash on its balance sheet). That's cheap relative to consensus expectations of 20% long-term growth, and you know the earnings report that sent T-zoo shares plummeting? It showed earnings rising 48%. Long story short, I'd more likely go long this one than short -- in fact, I like it so much that I'm going to go ahead and recommend buying Travelzoo on CAPS.
Want to see how the pick works out? To tell the truth, I'm kind of curious myself. Click here to follow along.
The bull case for Ceradyne
Of course, that's just my opinion -- I could be wrong. And if you ask CAPS members, they'll likely tell you that your best bet on today's list isn't Travelzoo at all, but five-star-rated Ceradyne. Why?
CAPS member DoctorCJ introduced us to Ceradyne last year as "the industry leader in high tech ceramics with no competition within sight. The new materials they have can do things that add value to the energy industry that 5 years ago were considered economically impractical to pursue."
All-Star investor Smittyh calls it "a solid company," and at a nice price, too: "PE around 10 and debt well handeled."
And mat05 likes the fact that Ceradyne's "not purely defence stock anymore," having made a "smart move into energy."
And much as I like the case for Travelzoo, as I've described above, I have to agree with the CAPS community on this one: Ceradyne looks like a great investment as well. Reviewing the firm's trailing-12-month numbers, we find the stock sells for less than nine times earnings, and has an even cheaper price-to-free-cash-flow ratio, thanks to the fact that it's been throwing off cash at a rate ($68 million) even faster than GAAP rules permit it to report earnings ($64 million).
Then, when you factor the company's $180 million in net cash into the equation, the stock market is practically giving this company away. Its enterprise-value-to-free-cash-flow ratio drops to 5.4.
Foolish final thought
So why are Ceradyne shares slumping? Last week's downgrade from The Benchmark Co. (to "hold") probably didn't help. As for whether Benchmark was right to downgrade -- or whether our CAPS community is right to endorse Ceradyne -- we'll learn the answer to that one tomorrow, when Ceradyne reports second-quarter earnings. Will Ceradyne win the prize and become our new top stock pick for 2012?
Fool contributor Rich Smith owns no shares of the companies mentioned. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 342 out of more than 180,000 members. The Fool has a disclosure policy.
The Motley Fool owns shares of Ceradyne. Motley Fool newsletter services have recommended buying shares of Travelzoo. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.