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 170,000 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 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?
(out of 5)
|Cisco Systems (NAS: CSCO)||(22%)||$16.50||*****|
|Frontier Communications (NAS: FTR)||(57%)||$3.47||***|
|DryShips (NAS: DRYS)||(46%)||$2.57||***|
|Great Basin Gold (ASE: GBG)||(73%)||$0.64||***|
|Roundy's (NYS: RNDY)||(19%)||$10.14||**|
Companies are selected by screening on finviz.com for abrupt 10% or greater price drops last week. Fifty-two-week high and recent price data provided by finviz.com. CAPS ratings from Motley Fool CAPS.
Five super falls -- one superball
Last week was a miserable one to be invested in the market, as more than 4,000 separate stocks lost value -- and that's the good news. The bad news is that 300 stocks (including all five named above) were decimated, losing 10% or more of their market caps. So what went wrong?
Beginning at the bottom, grocery store operator Roundy's took a roundhouse to the chin Friday when first-quarter earnings saw sales decline, profits plunge, and in a curious twist, tried to blame it all on ... the Green Bay Packers! (Who are guilty of many sins, but probably not this one.)
In contrast, with gold prices approaching a six-month low, Great Basin Gold looks to be guilty of nothing worse than being in the wrong industry at the wrong time. (That said, three-starred Great Basin may still not be the best way to bet on a rebound in gold prices. We profiled a better opportunity in our report: "The Tiny Gold Stock Digging Up Massive Profits." You can download it for free here.)
DryShips? Try "dried up." Between the company's history of poor shareholder relations, and the decline in dry bulk shipping rates, DryShips was at two strikes already when it began looking into oil drilling as a way to turn things around. Now that oil prices are cratering, it looks like DryShips has struck out.
And at Frontier Communications, a Q1 report touting "revenue growth, broadband penetration, and operational excellence" failed to impress investors -- who inexplicably decided to focus instead on the company's 51% decline in earnings instead. Ahem.
The bull case for Cisco
Amid all this bad news, perhaps the most perplexing story of last week's decliners was Cisco. The company beat earnings estimates with a stick. Regardless, investors sold it off over cautious CEO comments regarding future sales.
Ace CAPS investor TSIF, ranked No. 37 out of the 180,000-odd investors we track on CAPS, thinks this is a big, big mistake:
The 'market' often oscillates Cisco by 5 % on earnings announcements. ... I'm confident the market over punished Cisco for their weak knee guidance (normal), but ... if there is growth, Cisco will be there. If there is weakness, then Cisco has a moat, (technically and financially) to weather it.
Indeed, CAPS member twebb35 points out that if you "go into any switch room of any enterprise system ... you'll find cisco with that kind of market power there is no were to go but up and up!"
Cisco is no longer an innovator, but it does big business and still dominates the router market. It also has enough cash to buy innovation via takeovers. It's back to be priced for disaster, when in fact it's corporate overhaul is nearly complete. It's not going to light up the night sky, but Cisco can be a solid performer over the next few years.
And honestly, at a share price of just 12 times earnings, and an enterprise-value-to-free-cash-flow ratio of less than six, that's probably going to be all you need for Cisco to reward you richly in the years to come. For all the ashes-wearing, hair-tearing, and rending of pinstripes on Wall Street last week, the fact remains that Cisco is generating upward of $10 billion in annual free cash flow, and sits atop a pile of cash 32 billion bills high.
Are there faster growers in the tech market? Almost certainly. In fact, we recently profiled three of them for you in our report on "3 Hidden Winners of the iPhone, iPad, and Android Revolution." But from today's prices, all Cisco needs to do is get close to -- not even hit -- the modest 8.7% long-term growth target that Wall Street has set for it, and investors will eventually bid it back up to fair value.
Meanwhile, shareholders can sit on their cheap shares and collect their 1.9% dividend checks (better than any bank account is likely to pay you), and wait for Mr. Market to come to his senses. It's really as simple as that -- and it's the reason why right here, right now, I've personally put my reputation on the line to recommend buying shares of Cisco as well.
Will the stock turn around? Will the pick "work out"? Follow along and find out.
At the time this article was published The Motley Fool owns shares of Cisco Systems, but 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. 342 out of more than 180,000 members. The Fool has a disclosure 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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