In normal times, unemployment within spitting distance of 10% would be bad news indeed. These are far from normal times, of course, and the stock market has been defying the laws of economic gravity for a while now. Indeed, the S&P 500 has tacked on some 60% since its March lows.
Cash for clunkers
The rally has been especially kind to seemingly racy stocks such as Apple
Meanwhile, the valuation profiles of Qualcomm
If the recovery isn't as robust as the market seems to think it will be, stocks with aggressive valuation profiles such as these may take a hard hit. That's also true of Toyota
Meanwhile, over in the market's tech sector, Infosys Technologies
Dialing for dollars
During these strange days, however, you may be surprised to learn that I have my eye on Sprint Nextel, which delivered a 2009 gain of precisely 100%. Rocked hard amid the downturn, Sprint last paid a dividend in 2007, and it has posted negative net income during each of its past two fiscal years. At a glance, the company looks similar to the stocks 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 $35 billion in revenue during fiscal 2008, netting out a gross profit of more than $20 billion, and the company has been free-cash-flow (FCF) positive during each of the past five years.
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 includes Verizon and AT&T, my back-of-the-envelope valuation for the company comes in at roughly $7.50 a share. As I type, Sprint trades around $3.60.
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. 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 Inside Value's recommendations. Each comes with "buy-below" guidance -- the price below which our advisors feel the stock is a strong buy. That way, you'll know amid these strange and volatile days whether a recommended stock's price remains right. If you think you'd like to give our picks a try, click here to grab a completely free 30-day guest pass to a service designed to help you invest like an adult. There's no obligation to stick around if you find it's not for you.
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This article was originally published Aug. 19, 2009. It has been updated.
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. Shannon doesn't own any of the companies mentioned in this article. Sprint Nextel is an Inside Value pick. Apple is a Stock Advisor recommendation. Google is a Rule Breakers selection. You can check out the Fool's strict disclosure policy right here.