5 Superball Stocks
How Far From 52-Week High?
CAPS Rating(out of 5)
|Tata Motors (NYS: TTM)||-58%||$15.59||*****|
|Sandridge Energy (NYS: SD)||-50%||$6.72||****|
|Level 3 Communications (NAS: LVLT)||-38%||$1.66||***|
|JDS Uniphase (NAS: JDSU)||-66%||$9.88||**|
|Molycorp (NYS: MCP)||-38%||$48.65||*|
Companies are selected by screening on finviz.com for abrupt 10% or greater price drops over the past week. 52-week high and recent price data provided by finviz.com. CAPS ratings from Motley Fool CAPS.
Five super falls -- one superball
What a week. As markets melted under a summer sun, more than 5,200 stocks declined in value. More than 1,000 of these lost 10% or more of their market cap ... including each of the companies named above. So what went wrong?
Beginning at the bottom, a bullish prognosis on rare earths prices out of The Bedford Report Friday should have been good news for Molycorp. Unfortunately, that report was preceded by a column in Wednesday's Wall Street Journal reporting on a significant setback for Molycorp. Hitachi, it seems, has suspended talks on a joint venture to process rare earths with the miner. Soon after the news broke, so did Molycorp's stock price.
Bad news also struck the tech sector Thursday, when JDS Uniphase announced that after quadrupling earnings in fiscal Q4 2011, 2012 isn't looking quite as hot. Revenue guidance for the current fiscal first quarter is expected to come in as much as 15% below forecasts.
Cue sell-off at JDS. Cue sympathetic sell-off at peer telecoms play Level 3, too...
Sandridge? More like sand-bag. Faced with a need for $1 billion to fund its operations, Sandridge Energy announced it may have to sell natural gas assets to help raise cash. Forced sales rarely command the highest prices, unfortunately, and investors seem to be worrying that Sandridge won't come out ahead on this deal.
Last but not least is top-ranked (on today's list) Tata Motors. The Indian maker of Nano subcompact cars, and now also the owner of Ford's (NYS: F) old Land Rover and Jaguar brands, reported a 6% year-over-year decline in July global vehicle sales Tuesday. That probably contributed to the 15% decline in Tata's stock price last week, but it seems like an overreaction nonetheless -- and I'm not the only investor who thinks so.
The bull case for Tata Motors
CAPS member drbpconn, for instance, thinks Tata is an obvious winner as the incumbent automaker benefitting from "growth in India," but also because it benefits from the "strength of JLR earnings." (JLR is the subsidiary holding Jaguar and Land Rover.)
RallyCry exclaims "[Tata] is expected to grow 35% a year for the next five years. They are trading at a PEG ratio of .22 and [General Motors (NYS: GM) ] and Ford trade at a PEG in the .7 to .8 range. Both gross margins and operating margins for [Tata] are better than GM and [Ford]."
Now don't get me wrong -- I'm not swallowing these bull arguments hook, line, and sinker. Fact is, when I hear people promising 35% growth -- every year, for the next five years -- I'm immediately skeptical. India's clearly a growth opportunity, but even an Indian company is going to have to work really hard to achieve something like 35% five-year growth.
Fortunately, though, Tata doesn't have to even come close to that growth rate to justify its current stock price. At last report, the stock was trading for less than 5 times earnings, you see. Even low-double-digit growth should be more than enough to justify a price this low.
I'm also liking what I'm seeing on Tata's cashflow statements. Historical data shows that free cash flow has been steadily improving over the last couple of years. Meanwhile, Tata's most recent financial report shows that this growth trend remains intact. (A situation that's the polar opposite of what auto investors are seeing happen at GM lately, I might add.)
Time to chime in
Long story short, Tata Motors stock offers us the chance to own a fast-growing automaker. It gives us the further chance to own this stock at a very attractive price. I like it ...
But what do you think? Tell us on Motley Fool CAPS.
At the time this article was published Fool contributorRich Smithdoes not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 392 out of more than 170,000 members. The Fool has adisclosure policy.The Motley Fool owns shares of Ford Motor.Motley Fool newsletter serviceshave recommended buying shares of General Motors and Ford Motor. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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