"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:
CAPS Rating(out of 5)
Ultra Petroleum (NYS: UPL)
Carbo Ceramics (NYS: CRR)
Electronic Arts (NAS: EA)
The week in weak stocks
After a generally strong start to the week -- and the year -- Mr. Market hit a pothole Friday, giving up all the week's gains and ending down 0.5%. Still, with stocks enjoying a strong run in the first inning of 2012, only a very few companies have actually fallen to 52-week-low levels so far. This is a story about those few.
We begin with Electronic Arts, which thrilled investors earlier this month with a report of analyst-whooping earnings per share, and better-than-expected revenues to boot. Regardless, after enjoying a brief pop post-earnings, EA shares have gone nowhere but down. For this, you can probably blame the analysts at NPD Group, which last week reported a steep fall in revenues for the gaming industry as a whole. This has investors continuing to fret that Zynga (NAS: ZNGA) and its fellow "free" gamemakers are stealing sales from high-budget game producers like EA and Activision.
Never mind that the companies' actual results seem to disprove the theory. The fear, at least, is real -- and has EA shares stuck at just a three-star rating on CAPS.
This week, we also find Carbo Ceramics drilling down to a 52-week low. But here, it's fear of lawyers rather than fear of Zynga scaring investors. Last week's headlines were replete with news of class action lawsuits filed against the shale "fracking" specialist, which spooked investors with reports of weak sales and "logistical issues" in last month's earnings report -- and sparked a 20% sell-off in the stock.
Fracking also plays a part in this week's top-rated stock, Ultra Petroleum, which despite the name is actually more of a natural gas play than an oil stock. Despite (or perhaps because of) the fact that Ultra's selling at a seven-year low, the stock remains "ultra" popular on CAPS, where investors consistently give it a five-star rating. But why?
The bull case for Ultra Petroleum
Probably the biggest reason Ultra's stock is in a slump is the fact that its stock in trade is selling at a decade-long low. Priced per million cubic feet, natural gas hasn't been as cheap as it is today (about $2.50 per "mcf") since way back in 2002.
And yet, the commodity's very cheapness has CAPS member Wade32ru thinking that "nat gas can't stay this cheap forever!" EDoubleReturns agrees, predicting that "the glut will be eased. Folks will liquify and export." And when that happens, demand will rise even as supply begins to drain away.
Granted, there's no telling how long it will take for this to happen. But as All-Star investor vitrified points out, Ultra Petroleum is a "low-cost gas producer." As such, it's one of the companies better positioned to wait out the downturn in prices -- and better positioned than most to reap beaucoup profits when prices perk up.
Indeed, some companies are already working to hasten the day gas prices bounce back. Chesapeake Energy (NYS: CHK) , for example -- one of the nation's larger producers -- recently announced an 18% reduction in daily gas production, and said it would cut new well drilling by 50% in response to low prices on nat-gas. These are logical moves, given that Chesapeake's cost of production is estimated to be about $7.50 per million cubic feet -- three times Ultra's own cost, and three times the going rate for gas these days.
Foolish final thought
These are also good moves for Ultra. On the one hand, it can piggyback on any rise in gas prices caused by Chesapeake's move. On the other, Ultra can start earning profits much sooner than Chesapeake can, thanks to Ultra's lower cost of production.
My guess: That means that when gas prices do turn around, Ultra will be faster to bounce back than Chesapeake will.
Are there other ways to make money from cheap natural gas? You bet there are -- and the cheaper, the better. Read our new -- and free! -- report, and we'll tell you all about:One Stock to Own Before Nat Gas Act 2011 Becomes Law.
At the time thisarticle was published Fool contributorRich Smithowns shares of Activision Blizzard. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 387 out of more than 180,000 members.The Fool has adisclosure policy.The Motley Fool owns shares of Activision Blizzard and Ultra Petroleum. The Fool owns shares of and has written calls on Activision Blizzard.Motley Fool newsletter serviceshave recommended buying shares of Chesapeake Energy, Ultra Petroleum, and Activision Blizzard.Motley Fool newsletter serviceshave recommended creating a synthetic long position in Activision Blizzard.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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