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 awhile, 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:
How Far From 52-Week High?
|InterDigital (NAS: IDCC)||(56%)||$35.86||****|
|Silver Standard Resources (NAS: SSRI)||(59%)||$14.66||****|
|Silver Wheaton (NYS: SLW)||(30%)||$33.18||****|
|Hecla Mining (NYS: HL)||(54%)||$4.53||****|
|Seagate Technology (NAS: STX)||(7%)||$26.71||***|
Five super falls -- one superball
Stock markets continued their relentless climb last week, with the Dow Jones Industrial Average, for example, closing higher every day of the week before Friday's retreat. But not all investors have been so lucky. Up above you see five names that suffered 5% or more drops for the week. What went wrong?
Starting at the top, wireless IP house InterDigital took a big hit Tuesday, based on... nothing that I can see. The company had no bad news to report last week, and even confirmed that it's maintaining its dividend payout at a 1.1% yield. Still, at 18 times earnings and an earnings growth rate that most analysts expect to be negative over the next five years, I see little to like in this stock.
Stranger still, we saw declines in share price at silver miners Silver Standard, Silver Wheaton, and Hecla Mining. This seems strange given that the Labor Department warned of rising inflation in the economy. Silver, like other precious metals, is usually considered a hedge against inflation, and should arguably benefit from inflation fears. But with two of these companies showing negative free cash flow currently, and the third -- Silver Wheaton -- reporting free cash flow that lags reported net income by nearly 30%, the silver stocks don't really excite me, either.
In fact, when you get right down to it, the stock on this week's list that seems to have the best prospects for a quick bounce-back is the one investors are least interested in. In a sea of four-star-rated CAPS stocks, three-star-rated Seagate Technology looks like the best bet out there.
The bull case for Seagate Technology
One of just two dominant manufacturers of hard-disk drives, Seagate may be suffering from short-term investor infatuation with the hard-disk-less "new iPad," released last week. Other than that, however, there was really no explanation for Seagate's sell-off -- and the stock's long-term prospects look bright.
As CAPS member TotallyJaded points out, "traditional hard drives aren't going away any time soon, so SSD component makers aren't going to be eating Seagate's lunch."
Fellow CAPS player Wakester0 looks forward to seeing "Seagate locking up contracts for their hard drives at higher prices" in the wake of Thai flooding that hurt rival Western Digital more than it did Seagate.
And MHenage observes that Seagate generates "good free cash flow," and has a "good balance sheet."
Truth be told, Seagate's $747 million in trailing free cash flow is actually a bit behind the company's $915 million in reported net income. But it's still good enough to give this stock a 16 price-to-free-cash-flow ratio. With Seagate paying out a dividend of nearly 4% annually, this means the stock should only have to produce earnings growth of about 12% a year to justify its current share price. In fact, though, most analysts expect to see Seagate grow twice that fast -- better than 24.5% earnings growth -- over the next five years.
Seagate shares have already doubled over the past year. But at today's share price of $26 and change, the stock still looks like a bargain. With a near-50% margin of safety, even a substantial shortfall in projected earnings growth should reward shareholders richly -- and if Seagate does manage to produce the 24% profits growth Wall Street expects of it, the stock could even double again.
It's for this reason that I'm naming Seagate my "superball" stock of the week, and I'm backing up my recommendation with an outperform CAPScall on the stock. Want to see how it works out? Follow along.
At the time this article was published Fool contributor Rich Smith does not own shares of (or short) any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 387 out of more than 180,000 members. The Fool has a disclosure policy.The Motley Fool owns shares of Western Digital. Motley Fool newsletter services have recommended buying shares of InterDigital. 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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