Get Ready for the Bounce
"Don't catch a falling knife," as the old saw commands. (Pardon my mixing cutlery metaphors.) 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)
|Encana (NYS: ECA)||$34.32||$17.49||*****|
|Chesapeake Energy (NYS: CHK)||$35.51||$21.41||*****|
|Hugoton Royalty Trust (NYS: HGT)||$24.67||$15.33||****|
|Pegasystems (NAS: PEGA)||$47.46||$26.46||****|
The week in weak stocks
2012 started out with a bang for stock investors, as the Dow Jones Industrial Average gained a good 200 points in its first couple of days of trading, and ended its first week of the year up a respectable 1.2%. Week 2 went well, too, tacking on an additional 0.5% gain. But not everyone's cheering. Up above, you see a quartet of stocks at a crossroads. They've all hit 52-week lows ... but is this just a precursor of worse news to come, or has the time for a turnaround arrived at last?
Among CAPS investors, hope springs eternal, as all four of these stocks sport above-average ratings of four or five stars. Depressed natural-gas prices have Wall Street singing the blues at Encana (gas transport), Chesapeake (gas production), and Hugoton Royalty (royalties on gas production), but:
CAPS member theHisO sees potential for profit in "natural gas exportation" for Encana, while another of our members, knudfool, is encouraged to see that nat-gas is "now becoming an option for vehicles."
QueenDeBling likes Chesapeake's "great presence in the Marcellus Shale. They also hold contracts for millions of acres which can be drilled on, or have their rights sold, to help their bottom line."
Meanwhile, CAPS member dpid thinks that "over long term," today's share price on Hugoton Royalty will prove "a good entry" point. After all, as tombyang admits, "production of NG is not going to go down," and "HGT owns ONLY NG parts of XTO." While that's not good news so long as nat-gas prices remain in the dumps, Exxon Mobil (NYS: XOM) bought XTO for its nat-gas assets. If XTO was good enough for Exxon, perhaps it will still reward patient Hugoton shareholders as well?
The bull case for Pegasystems
Now personally, I'm pretty pessimistic about the prospects for nat-gas prices. Supply's only going up, and until new sources of demand emerge, and find support, Economics 101 tells us this is going to cause prices to continue to fall. This, in my mind, makes prospects for an immediate bounce in the share prices at Encana, Chesapeake, or Hugoton Royalty look slim.
In contrast, I do see a good chance for rebounding stock prices at Pegasystems. Alone on the list of last week's losers, Pegasystems has nothing to do with the nat-gas market. (It's a software play, plain and simple. A maker of "business process management" and "customer relations management" software -- the kind of stuff that helps customer service reps know what to tell you when you ring them up.) Also alone on the list, Pegasystems had no bad news to announce last week. Rather, it had a coterie of short sellers surrounding the stock; at last report, 20% of the shares were sold short.
But is Pegasystems really a good short candidate? I mean, yes, the company's 141 P/E ratio looks scary. But with nearly $39 million in annual free cash flow, Pegasystems may not be as expensive as it looks. Valued on FCF, the company trades for only a 25.5x multiple. If the company can achieve the 24% long-term growth rate that Wall Street has it pegged for, that seems a pretty reasonable price to me.
And I'm not the only Fool who thinks so, either. CAPS member fijiboi sees the stock as "oversold," while akhilrulez predicts "strong growth in Voice & Non-Voice BPM," and points out that Pega is a "market leader in its category in Forresters."
Withstrong growth ahead of it, a proven ability to produce cash profits, nearly $100 million worth of cash in the bank -- and not a lick of debt -- Pegasystems looks poised to outperform. That's why I'm naming it this week's 52-week-low-hitter that's most likely to bounce back.
Not fearless enough to venture into heavily shorted stocks with bounce-back potential? Prefer to take the safer road, and stick with low P/E companies paying big dividends? That's fine, too. In fact, our Foolish analyst team just may have the stocks you're looking for. Read our new report -- for free! -- on 13 High-Yielding Stocks to Buy Today.
At the time this article was published Motley Fool newsletter serviceshave recommended buying shares of Chesapeake Energy and Pegasystems, but 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. 330 out of more than 180,000 members. The Fool has adisclosure policy.Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
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