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 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?
|UnitedHealth Group (NYS: UNH)||(8%)||$55.82||*****|
|Nike (NYS: NKE)||(20%)||$91.38||****|
|Ford (NYS: F)||(33%)||$9.50||****|
|Veolia Environnement (NYS: VE)||(57%)||$11.17||****|
|Solazyme (NAS: SZYM)||(54%)||$12.77||***|
Five super falls -- one superball
Despite yet another miserable jobs report (our third in three months), stock markets ended last week much as they had begun -- off only 0.5% in total. Not every stock was so lucky, though. In fact, nearly 1,200 separate stocks declined in value last week, with literally dozens losing 5% or more of their market cap ... including all five of the stocks named above. So what went wrong?
Beginning at the bottom, we find a quick answer to the question of why Solazyme sank: An analyst at Raymond James pointed out that the stock had already hit his price target, and so he downgraded it. Solazyme shares dutifully sold off, and now sit back below RJ's price target. (Guess who's going to be upgrading Solazyme next?)
Similarly, Veolia got hit with a downgrade Thursday, this time from UBS. Curiously, this was a much more significant ratings switcheroo than Solazyme investors encountered, as UBS dropped Veolia all the way to "sell." Yet Veolia shareholders appear to have dodged a bullet -- the downgrade only cost them 4%.
Rounding out the list, Nike took a tumble post-earnings, while Ford got hit after an earnings warning. Yet even so, the vast majority of the stocks on the list above still enjoy strong investor support on CAPS. Most curious of all, though, is UnitedHealth Group, the sole stock here with the highest CAPS rating -- a perfect five stars.
The bull case for UnitedHealth Group
By all rights, UnitedHealth should still be flying high on news that the Supreme Court upheld Obamacare's requirement that everyone in America buy health insurance by 2014 ... or else. Honestly, it's hard to imagine an outcome that would sound more favorable to a purveyor of health insurance like UnitedHealth.
All-Star CAPS player Munchies101 calls UnitedHealth "the biggest boy" in the health-care insurance business, the company in "the best financial situation" and the one that "can weather almost any storm."
CAPS player Yeti434 predicts UnitedHealth will be "taking full advantage of the increasing volume of patients in the next 10 years."
And CoreAndExplore likes the firm's "high ROE and net margin," its "healthy" debt levels, and especially UnitedHealth's "strong annual earnings growth."
So do I. And it doesn't hurt, of course, that these profits come at an extremely affordable price. Valued at less than 12 times earnings, UnitedHealth looks fairly priced for 10% long-term earnings growth, with a 1.5% dividend yield. And it may even be cheaper than it looks, inasmuch as the company's GAAP financials understate true free cash flow by more than a third. Over the past year, you see, UnitedHealth's reported income came to just $5.2 billion -- but its actual free cash flow was $8.2 billion.
Valued on the free cash it produces, UnitedHealth Group looks less like a "12 P/E stock" to me than it looks like a firm selling for less than seven times free cash flow. A company that, if it were so inclined, could generate enough cash to pay you back your entire initial investment, and leave you owning the business for free... in less than seven years. In other words, a bargain.
Fools, there are a lot of companies that a lot of investors think could skyrocket after the 2012 presidential election (download our free report to read about four such opportunities). Thanks to the Supreme Court decision, UnitedHealth now looks to me like a stock that could skyrocket even before the election.
At the time this article was published Fool contributorRich Smithdoes not own shares of (or short) any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 359 out of more than 180,000 members. The Fool has adisclosure policy.The Motley Fool owns shares of Ford and Solazyme.Motley Fool newsletter serviceshave recommended buying shares of UnitedHealth Group, Nike, Ford Motor, and Veolia, as well as creating diagonal call positions in UnitedHealth Group and Nike and creating a synthetic long position in Ford. We 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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