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.
So to find 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) |
|---|---|---|---|
|
Leucadia National |
(30.3%) |
(67.4%) |
***** |
|
Foster Wheeler |
(22.0%) |
(72.1%) |
***** |
|
Southern Copper |
(21.9%) |
(53.0%) |
***** |
|
Cemex |
(19.7%) |
(69.8%) |
***** |
|
Eaton |
(17.3%) |
(48.2%) |
***** |
|
Sasol |
(16.8%) |
(41.0%) |
***** |
|
ConocoPhillips |
(15.7%) |
(40.5%) |
***** |
Data from Motley Fool CAPS as of Feb. 3.
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 some further research. I'll even get you started with some thoughts on Eaton.
Why so blue?
It's earnings season, and a declining stock likely means that a company has disappointed the folks on Wall Street. Though Eaton managed to top analysts' (revised) estimates with its fourth-quarter report, the realization that Eaton may not be able to skate through the downturn seemed to set in after the company's rundown of earnings.
Eaton actually grew up decades ago as a company focused on the automotive and trucking world -- first with truck axles, then with a broader array of auto parts. Management, however, wanted to give the company additional stability and extended its reach into other areas, such as aerospace, hydraulics, and electrical power. This strategy had been working out swimmingly as the automotive and trucking markets fell through the floor over the past couple of years.
However, with the global recession broadening and deepening, there are fewer hiding places for Eaton, and it doesn't have a particularly sanguine outlook for any of its business segments in 2009.
What the bulls say
While it's true that all of Eaton's businesses are taking a hit, the headwinds that the company is expecting to see in segments like aerospace and electrical power are like a strong breeze compared with the hurricane winds hitting the auto and trucking markets. So while business will be much slower in 2009, we shouldn't expect a complete collapse in Eaton's financials. Liquidity-wise, though things may get a little tight, if the company cuts back on its diet of acquisitions, it shouldn't have too much trouble meeting its debt obligations.
On CAPS, 98% of the members who have rated the stock think it will outperform the rest of the market. Most of these Eaton fans are looking past the current economic softness and expecting that Eaton will come out the other side a stronger company, ready to step up its game as end markets come back to life. Ak66, who gave Eaton's stock a thumbs-up in late December, seems to be of this mind:
I don't know where thsi company will track over the next two years, but I do know that it is an excellent company with a solid long-term future. I am not betting on a particular future- this stock is just too cheap to pass up at today's prices.
So do you think the recent drop has created a good buying opportunity? Or will Eaton continue to sink with the rest of the market? Let the community know what you think -- head over to CAPS and share your thoughts with the other 125,000 members currently part of the community. Even if you'd prefer to pass on Eaton, you can check out a couple of the other stocks listed above, or any of the 5,400 stocks that are rated on CAPS.
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