These three companies just didn't live up to Mr. Market's expectations last week. Sometimes an earnings stumble is a signal to sell, but digging in the dirt is also a good way to find turnaround candidates while they're getting beaten down.
Today, we'll look at two once-mighty trendsetters who have fallen on hard times, and a Chinese cash cow you might not have seen before.
Hopeless in Seattle
First up is a very familiar name: coffee shop chain Starbucks
Fellow Fool Alyce Lomax was moved to ask whether the java giant is nearing its demise, but came away with a distinct "heck no" upon closer examination."I think it's still a high-quality stock for the long haul, despite all of the current, bitter pessimism," said Alyce, though our readers recently voted Starbucks as the scariest stock on the market.
It's hard to argue against the wisdom of the crowds, but I have to land on my dear colleague's side here. The hypergrowth flag over Seattle may have fallen, but Starbucks has still generated almost $1.3 billion in cash flow from operations over the last four quarters. The balance sheet looks strong, with $322 million in cash and short-term investments and a very reasonable $550 million long-term debt load. You want a scary cash-to-debt balance? Quick-serve rival Yum! Brands
At the end of the day, Starbucks' stock now trades for about 20 times trailing earnings and 3.3 times book value. Two years ago, the P/E swam in the 50s and price-to-book was over 11. Compared to the same quarter in 2006, sales have grown by 12% annually, but operational cash flow has fallen by roughly 4% per year. Nevertheless, enough consumers are addicted to Venti half-caf soy hazelnut macchiatos and orange mocha Frappuccinos to keep Starbucks alive for many years, giving management time to figure out this whole turnaround strategy thing.
The stock may still move lower from here, but the bounce off the bottom shouldn't be far off -- and even a modest recovery should give the stock a major boost as Mr. Market overcomes his deep-rooted skepticism. Patience is a virtue.
Please don't feed the crocodiles
Let's move on to last year's scariest stock -- lightweight footwear wrangler Crocs
Last year's $0.66 profit per share turned into $1.79 per share of red ink, and revenue dropped 32% year over year to $174 million. The average analyst was hoping for a tiny $0.02 profit per share, and about $200 million in sales.
As recently as last year, Crocs was growing like Hansen Natural
Then the fad popped, and consumers got bigger things to worry about than the brand name on their plastic clogs. Plenty of other shoemakers sell virtual clones of Crocs' flagship models and materials, often at far lower prices. But that expensive infrastructure remained. That's where the losses start.
If you still believe that Crocs is a durable fashion trend and no fad at all, feel free to buy this stock at the eminently reasonable valuations we see today. But I called it a fad last year, and I will stand by that statement. In another five years, this brand will rank right up there with pet rocks, Tamagotchis, and low-carb diets in the pantheon of all-but-forgotten trends.
A Chinese mirage
Let's end on a happy note after all this negativity. Our final underperformer this week, Chinese online gaming expert NetEase.com
Online gaming in China "shows no obvious signs of slowing," according to CEO William Ding. The company's performance backs up his macho words. That's not just great for NetEase itself, but also for other online gaming businesses in Southeast Asia such as GigaMedia
There are plenty of excellent investment opportunities in the Asian gaming sector -- and Netease is certainly one of them.
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Shanda Interactive, Netease.com, and GigaMedia are Motley Fool Rule Breakers picks. Crocs is a Motley Fool HG PayDirt recommendation. GigaMedia is a Motley Fool Global Gains selection. The Fool owns shares of Starbucks, which is a Motley Fool Inside Value pick and a Motley Fool Stock Advisor recommendation.
Fool contributor Anders Bylund owns shares in Hansen Natural but holds no other position in the companies discussed this week. The Fool has an ironclad disclosure policy, and you can see his current holdings for yourself.