5 Superball Stocks
When stocks fall fast and far, they sometimes set themselves up for remarkable rebounds. The following equities suffered dramatic drops over the past week. With help from the 180,000 members of Motley Fool CAPS, we'll see whether any of them have the potential to bounce back.
It's been a while, but thanks to last week's selloff, 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.
How Far From 52-Week High?
CAPS Rating(out of 5)
|Valero (NYS: VLO)||(32%)||$21.81||*****|
|Clearwire (NAS: CLWR)||(78%)||$1.47||**|
|Rambus (NAS: RMBS)||(65%)||$8.41||**|
|Molycorp (NYS: MCP)||(65%)||$28.36||*|
|salesforce.com (NYS: CRM)||(31%)||$113.43||*|
Companies are selected by screening on finviz.com for abrupt 10% or greater price drops over the past week. Recent price and 52-week-high data provided by finviz.com. CAPS ratings from Motley Fool CAPS.
Five super falls -- one superball
Last week wasn't a great one for stocks. The Dow Jones Industrial Average (INDEX: ^DJI) shed 3% of its market cap in five days, and shareholders in more than 5,100 companies ended the week poorer than they went into it. These five names are among the week's worst performers, each literally decimated by losing 10% or more of its value. So what went wrong?
- Beginning at the bottom, salesforce.com took a tumble when the company reported that Q3 billings rose "only" 29% ... and beat both revenue and earnings estimates ... and raised issued higher-than-expected guidance. Analysts immediately panned the report. Go figure.
- Rare-earths play Molycorp took a tumble as well, and this time there was more logic to the loss. As with salesforce.com, growth was good, but this time the company missed analyst estimates. The company's also expanding production -- which sounds like a good thing, but as my Foolish colleague Travis Hoium points out, it raises the risk of flooding the market with commoditized rare-earth metals -- threatening profit margins not just at Molycorp, but at rivals such as Rare Element Resources (NYS: REE) as well.
- Rambus ... you could hardly have missed the Rambus story. It lost an antitrust suit against Micron (NYS: MU) last week, its stock stopped trading, and when it started up again, it was already down 78%. Ouch.
- And of course there was Clearwire, confirming our worst fears that a default may be imminent.
Is it any wonder investors are skeptical of these stocks? Yet despite all the bad news, we still see a single-five star gem perched up there atop all the one- and two-star ratings. Its name is Valero, and it's the focus of today's column.
The bull case for Valero
Markets are panicking over a decision by Enbridge and Enterprise Products Partners to "reverse the flow" of their Seaway pipeline, sending pent-up crude in Cushing, Okla., to oil-starved consumers on the Texas coast -- and stripping Valero of access to overstocked, undervalued crude.
But not all investors are nervous. Ace CAPS investor EnigmaDude, for example, still thinks there's a long-term bull argument in Valero's favor, based on "rising global demand" for oil and gasoline. And CAPS member Trikona points out that Valero is "expanding operations to Europe" to meet this demand and calls it a "solid company."
We also read that it's a solid company at a great price, according to CAPS All-Star Staka, who spotlighted the company's low price relative to "tangible book value" this past summer and argued that it was an outperformer based on its (then) forward P/E ratio of 8.
Veni, vidi, Valero?
That price has only gotten better in the months since. Today, Valero sports a current P/E ratio of 7.5. Based on next year's earnings estimates, the forward P/E ratio drops down to below 5.0. And for fre- cash-flow aficionados, the story's even better. Valero's $2.7 billion in trailing FCF exceeds reported GAAP net income by 66% -- and yields a price-to-free cash flow ratio of just 4.4.
If consensus estimates of 38% long-term earnings growth are anywhere near accurate, that's shockingly cheap. Sure, 38% seems a bit high. And yes, if something looks too good to be true (as this certainly does), it probably isn't true at all. But here's the thing: Valero doesn't have to grow anywhere near as fast as Wall Street says it will for the stock to be a bargain. If Valero grows at only the average 16% annual rate predicted for the oil-refining industry as a whole, the stock's still selling at a sizeable discount to intrinsic value.
Long story short, I'd be a buyer at these prices. In fact ... here, I'll put my reputation where my mouth is and run over to Motley Fool CAPS to rate this stock an "outperform" right now.
Looking for more great bargains in the energy industry? Take a gander at our new -- and free! -- report, and find out all about our latest discovery: "One Stock to Own Before Nat Gas Act 2011 Becomes Law."
At the time this article was published Fool contributorRich Smithowns shares of Micron. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 302 out of more than 180,000 members.Motley Fool newsletter serviceshave recommended buying shares of Enterprise Products Partners and salesforce.com.Motley Fool newsletter serviceshave also recommended shorting salesforce.com. We Fools don't 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.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.