Not all boats rise with all tides. Some hulls have holes. Others are abandoned in dry dock. And so it goes with the market: After three painful years, the second-quarter rally was welcome, but don't assume that every stock enjoyed the ride.
Among those that didn't are my beautifully battered. Yes, their hulls have been bashed, but seaworthiness -- or lack thereof -- need not be a permanent condition. At least not so long as the fundamentals are in place for a recovery.
And so, today, with a respectful nod to Ben Graham and value investors everywhere, we board three unfortunates not invited when the S.S. Unsinkable set sail. All have lost more than half their value over the past year. All three messed up. But none deserves to have sunk so far.
Back in February, the cash-rich Nautilus was so confident that it initiated a quarterly dividend to go along with a $50 million share buyback. At the time the company expected to earn between $2.50 and $2.60 per share in 2003. Two months later, those estimates were pared to a range of $1.60 to $1.70 per share. Earlier this month, it was more of the same, as Nautilus lowered its 2003 EPS targets to barely a buck. With revenue projections falling from as high as $600 million back in February to as low as $450 million today, it's easy to see why investors lost interest in Nautilus.
Sorry about that, Nautilus. It didn't work out with the workouts? Hans and Franz didn't pump -- insert clap -- you up? Don't worry. Some of us see the value.
Just what is eating at Nautilus? The economy is weak, and we're getting fatter on comfort foods while avoiding big-ticket items like fitness gear and high-end mattresses. And yet, given a hefty 3.8% yield and more-than-sufficient liquidity to cover the payout, things will have to get drastically worse for this stock to erode a whole lot further.
More likely, the economy will bounce back; it always has. And when it does, won't we want to get our bodies back in shape and relish the opportunity of spending some dough on a good night's sleep? Even now, the stock is trading at less than four times last year's earnings.
Tier has its hands in everything from information technology consulting to processing child-support payment transactions. And its results haven't been nearly so shabby as one might expect given the company's dependence on the lately tight-fisted, state and Federal governments.
In fact, thanks to an aggressive acquisition strategy, the company is looking to grow revenues by at least 42% this year and to exceed last fiscal year's $0.45 per-share earnings. Indeed, Tier has been consistently profitable, despite the IT-cooties epidemic, and has a cushion of $66.7 million in cash and investments (equal to roughly 40% of its total market capitalization).
To be sure, corporate spending will have to improve before many of Tier's clients start loosening their purse strings, but there is a lot to like here, even as we wait out the storm.
Yet, here I am, a bull in this china shop, ready to argue that within this ugly duckling sleeps the potential of a swan. For starters, realize why Oneida is in this mess. Selling high-end flatware and dinnerware to a spendthrift world hasn't been easy. After all, unless you're a clumsy plate juggler at the circus, this isn't exactly a consumer non-cyclical niche. When things get tight, folks wait longer to upgrade their dining rooms.
It's even worse in the foodservice sector; I mean, at least you're still eating at home. The slide in tourism has resort hotels beating the bushes for guests, while restaurants are just squeaking by. Add it up and smashed plates and dinged forks simply aren't getting replaced the way they once were. But isn't that creating a backlog of pent-up demand for when the climate improves?
Of course it is. And Oneida's setting the table for the coming feast. Management trimmed overhead through a painful wave of layoffs earlier this year. By next year, the company will have a lean manufacturing system in place at its flatware factory. So even if the economic turnaround shows up fashionably late, Oneida should have some room to wiggle.
None of these stocks is perfect. Call them Hidden Gems, call them beautifully battered (who knows, maybe one day I'll be a visiting analyst in Tom Gardner's Motley Fool Hidden Gems); either way, when legions of flawed stocks are hitting fresh new highs, there's something to be said for the best of those left staring up at the stars. They will get their Bon Voyage in due time. For deep down inside, there's a gorgeous investment waiting to come out.
Rick Aristotle Munarriz enjoys seeking out diamonds in the rough but he hasn't walked the plank far enough to buy into any of these three stocks yet. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.