In normal times, an unemployment figure hovering within spitting distance of 10% would be bad news indeed. These are far from normal times, of course, and the government's latest reading of 9.4% was taken as excellent news, with the stock market shooting up nicely in response. That's particularly remarkable given the months-long rally we've been on, an upswing that's seen the S&P 500 tack on more than 40% since hitting its March lows.
Cash for clunkers
The rally has been especially kind to distressed, profitability-impaired stocks like Motorola (NYSE:MOT) and Las Vegas Sands (NYSE:LVS), each of which shed boatloads of free cash flow in fiscal 2008. If the recovery isn't as robust as the market seems to think it's going to be, financially weak stocks like those are likely to take a hard hit. Their fat year-to-date gains will be so much hot air let out of a helium balloon, leaving those investors left holding the bag talking funny when the skid hits the fan.
That's also true of student lender SLM (NYSE:SLM) and penny-stock broadcaster Sirius XM Radio (NASDAQ:SIRI) -- two more iffy propositions that investors have bid up for reasons that …
Well, it's hard to think of a reason, actually. Yes, it's turned out that -- lo and behold! -- the end of the world wasn't nigh last fall. The apocalypse didn't occur in March, either. Still, with huge bullet holes in their financials, and anemic earnings-growth expectations to boot, these two jokers aren't even good for comic relief.
That's particularly true given that there's ample reason to believe that this recession may not be done with us yet. The recent relatively good unemployment news, after all, was preceded by grim figures on the retail front. Consumer spending, the linchpin of our economy, remains moribund. In the long run, it's good news that the savings rate remains high, but paying down debt doesn't stimulate the economy.
Dialing for dollars
Against that backdrop, one stock I have my eye on during these strange days is Sprint Nextel (NYSE:S), which is up about 100% on a year-to-date basis.
Rocked hard amid the downturn, Sprint last paid a dividend in 2007, and it has posted negative net income during each of its last two fiscal years. At a glance, the company looks similar to the junk I trash-talked above. Yet one Fool's trash is another's treasure -- and Sprint looks like a diamond in the rough to yours truly.
At some level, after all, even flailing companies can make attractive investment prospects. Sprint isn't exactly flailing: It raked in more than $18 billion in revenue during fiscal 2008, and the company has been free-cash-flow (FCF) positive during eight of the last nine years. The sole miss occurred way back in 2001, and the last 12 months have seen a sharp FCF increase compared with 2008.
On the risk side of the ledger, I'm troubled by the company's recent debt offering. Yet even after factoring this fresh development into the analysis, Sprint appears to be trading at a steep discount to fair value. Indeed, using a normalized free-cash-flow figure and conservative estimates of earnings growth that account for Sprint's third-place status in a race that also includes Verizon (NYSE:VZ) and AT&T (NYSE:T), my back-of-the-envelope valuation for the company comes in at roughly $7.50 a share. As I type, Sprint currently trades near $3.80.
About that envelope
I didn't actually use one. I used the discounted cash flow (DCF) calculator that comes gratis with the Fool's Inside Value service instead. With pointers to the data you need, this no-muss, no-fuss tool comes in handy indeed when winnowing a field of contenders down to just those that appear worthy of further research.
And if you'd rather leave that work to others, not to worry: In addition to resources like the DCF tool, members have complete access to all of IV's recommendations. Each comes with "buy-below" guidance -- the price below which our advisors feel the stock is strong buy. That way, you'll know amid these strange and volatile days whether a recommended stock's price remains right. Click here to give IV a go. It's free to try, and there's no obligation to subscribe.
Shannon Zimmerman runs point on the Fool's Duke Street and Ready Made Millionaire services, and he runs off at the mouth each week on Motley Fool Money, the Fool's fast n' furious podcast. A fresh edition of MFM hits iTunes each Friday, and you can listen by clicking here. (Link opens iTunes.) Sprint Nextel is a Motley Fool Inside Value recommendation. You can check out the Fool's strict disclosure policy right here.
