Get Ready for the Bounce
Don't catch a falling knife, as the old saw commands. (Pardon my mixing a cutlery metaphor.) The idea of buying a former superstar stock at a discount price certainly has its attractions, but you've got to make sure you catch the haft -- not the blade. That's where Motley Fool CAPS comes in.
It's been a while, but thanks to last week's sell-off, we once again have a chance to stand beneath Mr. Market's silverware drawer in hopes of snagging a bargain. Let's meet today's contenders:
(out of 5)
|Ultra Petroleum (NYS: UPL)||$51.20||$32.87||*****|
|Akamai (NAS: AKAM)||$54.65||$20.64||****|
|National Bank of Greece (NYS: NBG)||$2.87||$0.84||***|
|Textron (NYS: TXT)||$28.87||$15.64||***|
|Human Genome Sciences (NAS: HGSI)||$30.48||$12.63||**|
The week in weak stocks
Christmas came early for stock investors last week. Steve Jobs retired, rumors swirled over Bank of America (NYS: BAC) possibly needing $200 billion to stay solvent, and Ben Bernanke gave a speech -- yet despite all these potential stumbling blocks, stocks still managed to rise 4.7% for the week.
Some stocks. Not all.
Above, you see five names that bucked the trend and managed to post their worst prices in a year. So what went wrong? It wasn't always clear. At Human Genome, for example, the week actually started off strong with an initiation at "buy" from the friendly financiers at Brean Murray. Didn't make a lick of difference, though -- the stock barely reacted to the endorsement, then began falling after it was made. Similarly, Textron's tumble seems to make little sense. Durable goods orders came in pretty strong last week, which should have been good news for an industrialist. Transportation orders were particularly propitious -- definitely good news for a business jet manufacturer like Textron.
On the other hand, the origins of other declines were all too obvious. National Bank of Greece, for example -- these days, just from hearing the name of that stock, you can guess it's going down. And Akamai, recently "downgraded" by the Fool's own Tim Beyers, got an official downgrade from investment banker Jefferies several days ago, and has been on a roller coaster ever since. In illustration of which, after briefly touching an intraday 52-week low Friday, Akamai popped right back up and actually ended the week higher than it went in!
Clearly, there are still a lot of folks who think this company can bounce back (as confirmed by its four-star rating on CAPS). And yet, Akamai still isn't the most popular stock on today's list. That would be Ultra Petroleum. Curious as to why? So am I ... so let's find out a little more about:
The bull case for Ultra Petroleum
Don't be fooled by the name; Ultra "Petroleum" is actually more of a play on natural gas. While the company claims only 31.7 million barrels of proven oil reserves, Ultra boasts 4.2 trillion cubic feet of proven nat-gas reserves -- the equivalent of 700 billion barrels of the pricey black goo.
Magnifying its advantages, CAPS member ipsiety tells us that Ultra has an "industry-leading cost structure" that "positions it to reap a windfall in an eventual price recovery, and its vast undeveloped acreage provide potential for above-market growth for years to come."
Isacsimon adds that Ultra's "average production costs less than trading price despite the bearish natural gas market."
And circaclown gets even more specific: "As of today the price [of natural gas] is $4.25/mcf, below many company's cost of production, including natural gas behemoth, Chesapeake (NYS: CHK) which has a production cost of $6.78/mcfe." The best reason to prefer Ultra Petroleum, therefore, is "because their production costs are $2.61/mcfe, and they are making money."
Lots of money. In fact, Ultra earned more than $330 million in profit over the past year, enough to give this $5 billion company a modest 15 P/E ratio. Meanwhile, most analysts expect Ultra to grow its earnings at better than 18% per year over the next five years.
Foolish final thought
By all rights, this should make Ultra Petroleum stock "cheap" enough to own. I personally don't intend to buy it, because like many capex-intensive energy plays, Ultra currently is not generating free cash flow from its business -- but to each his own. I know a lot of investors don't spend much time thinking about "free cash flow." And for those content to place their faith in a low PEG ratio, Ultra looks very cheap indeed.
Is Ultra Petroleum cheap enough for you? Tell us on Motley Fool CAPS.
At the time this article was published Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 397 out of more than 180,000 members.The Motley Fool owns shares of Ultra Petroleum, National Bank of Greece, Textron, and Bank of America.Motley Fool newsletter serviceshave recommended buying shares of Chesapeake Energy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has adisclosure policy.
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