Please ensure Javascript is enabled for purposes of website accessibility

Get Ready for the Bounce

By Rich Smith – Updated Apr 7, 2017 at 12:32PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

What goes down, must come up. (Or must it?)

"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 a while, 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:

Company

 

52-Week High

Recent Price

CAPS Rating
(out of 5)

Elbit Systems (Nasdaq: ESLT) $45.63 $30.29 ****
Vale SA (NYSE: VALE) $28.41 $16.82 ****
Active Network (Nasdaq: ACTV) $17.74 $10.99 *

Companies selected from the list of stocks hitting new intraday 52-week lows as reported on finviz.com. Recent price and 52-week high provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

With the S&P 500 basically coasting for most of last week, down a bare 0.5% in five days, there wasn't a lot of action on the "unbelievable bargains" front. Still, a few possibilities have presented themselves as Mr. Market delivered up new 52-week low prices on two stocks that investors like, and one more that they don't. Let's take them one at a time, and start with the more obvious choices.

Elbit Systems
If you've never heard of Elbit, don't be embarrassed. Not many U.S. investors have heard of it. Perhaps because Elbit runs its shop out of Haifa, Israel.

Broadly speaking, Elbit is a maker of "high-performance defense electronic and electro-optic systems for customers throughout the world" -- a defense contractor, in other words. (And we know how popular those kinds of stocks have been lately.) Elbit, however, is probably best known for its role in one of the segments of defense spending that's actually growing: unmanned aerial vehicles. Elbit makes the medium-sized Hermes UAV, and has done so well with this that a few years ago, defense contracting heavyweight General Dynamics (NYSE: GD) chose it as a partner to jointly build UAVs for the military.

Elbit could do pretty well for investors, too. Priced at just 14 times earnings, growing at 11%, and paying a 2.7% annual dividend, the stock looks at worst fairly priced. When you consider further that Elbit generates annual free cash flow 43% greater than its reported GAAP income, the stock could be even cheaper than it looks. CAPS member dgoldmeier calls Elbit "a solid company with a nice div. in a world which will continue to grow demand for their product lines." I agree.

Vale SA
Last week was a rocky one for anyone involved in iron mining. Australia's BHP Billiton (NYSE: BHP) announced it's shelving plans to expand iron mining in the country due to the global "boom" in commodities having finally ended. Suffice it to say that if BHP is right, this won't be good news for Vale, which is one of BHP's primary competitors on the global market.

Regardless, with its stock priced at just 6.3 times earnings, Vale's 6.1% annual dividend alone may justify the stock price, and that's if Vale never grows its earnings again... ever. My main reservation here is that most analysts seem to think Vale not only won't grow, but will see its profits decline markedly over the next five years. Long story short, of the two four-star CAPS stocks on today's list, I think Elbit is the safer bet.

But what about the one-star stock?

Active Network
At first glance, I admit there doesn't seem to be much to like about this stock. Active, which provides cloud-computing "applications services" to businesses, missed earnings rather badly earlier this month. Free cash flow, too, suffered a marked slowdown.

Even so, I think investors who are writing off Active as a "one-star stock" may be missing the bigger picture. It did lose money last quarter, but revenues were up nicely, and Active's free cash flow came in at a robust $31 million -- enough to give the stock a price-to-free cash flow ratio of just 20.

In short, if Active can bounce back from last quarter's earnings slump, and deliver on the 32% long-term growth rate that Wall Street has it pegged for, 20 times free cash isn't at all a bad price to pay. (Active may not be our absolute favorite tech stock at the Fool; to find out who is, click here to get our free report.)

Fool contributor Rich Smith does not own shares of, nor does he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 263 out of more than 180,000 members. The Fool has a disclosure policy.

Motley Fool newsletter services have recommended buying shares of Active Network. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

BHP Group Stock Quote
BHP Group
BHP
$48.87 (-4.57%) $-2.34
General Dynamics Corporation Stock Quote
General Dynamics Corporation
GD
$221.90 (-2.71%) $-6.19
Vale S.A. Stock Quote
Vale S.A.
VALE
$13.04 (-4.40%) $0.60
Elbit Systems Ltd. Stock Quote
Elbit Systems Ltd.
ESLT
$200.97 (-2.19%) $-4.51

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.