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?
CAPS Rating(out of 5)
|WellPoint (NYS: WLP)||(26%)||$55.12||*****|
|Cliffs Natural Resources (NYS: CLF)||(58%)||$39.39||****|
|Amarin (NAS: AMRN)||(15%)||$13.51||****|
|Level 3 Communications (NAS: LVLT)||(48%)||$18.70||***|
|Cell Therapeutics (NAS: CTIC)||(68%)||$0.52||**|
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
For the first time since May, the Dow Jones Industrial Average is back above 13,000, and right now, I'm betting a lot of your 401(k)s are looking better. Unfortunately, not all investors are so lucky. Last week, as the Dow reclaimed its crown, some 2,600 stock investors were losing their shirts. Nearly 100 separate lost more than 10% of their market cap on the week -- including all five of the companies named above. So what went wrong?
Sometimes, the answer to this question is just: "Nothing in particular." Take Cell Therapeutics. The company had no news of note last week -- certainly nothing necessitating a 12% markdown on its market cap. But with no profits, and even no revenue to speak of, there's little to base a valuation on here. Add the fact that Cell-T's got a low, penny-stock-ish share price, and the stock winds up trading mostly on emotion, up 12% one day, and down 12% the next, for no reason in particular.
Speaking of emotion, earlier this year my fellow Fool Anders Bylund warned investors to curb their enthusiasm for Level 3 Communications, a company he labeled the "worst of its breed." Did you listen? If not, you've only got yourself to blame for the 10% loss Level 3 suffered after reporting a sizable Q2 loss.
Meanwhile, conflicting emotions reign at Amarin. On the one hand, investors were pleased to learn that the FDA has approved Amarin's new hypertriglyceridemia drug, Vascepa. On the other hand, they aren't pleased at the strictures the FDA imposed on the drug's use -- strictures that my fellow Fool Matt Koppenheffer notes "will limit the overall addressable market for the drug out of the gate." Seeing as Amarin shareholders were counting on this drug to remedy their company's total lack of profits (and again, revenue), this was not really great news. Accordingly, the stock is down 11%.
And finally, Cliffs Natural Resources suffers from negative sentiment in two key markets: coal and steel. Neither one is looking particularly healthy these days, and Cliffs paid the price, down 14% on the week.
The bull case for Wellpoint
"But wait!" you say. "That's only four stocks. What about the fifth?" Well, that's actually a funny story. Like the other companies mentioned above, health insurer Wellpoint got whacked last week. Un-like the others, Foolish investors remain optimistic that Wellpoint will bounce right back -- as well they should.
Consider: Priced at just 7.6 times earnings, and an even lower 6.6 times free cash flow, Wellpoint already looks like a bona fide bargain relative to long-term growth estimates that approach 10%. But this story actually gets better:
- Wellpoint also pays a 2.1% dividend, making it even cheaper.
- And it generates more free cash flow ($2.7 billion) than it reports as net income ($2.5 billion) -- making it cheaper still.
- And, to put a rich maraschino cherry atop the this delicious ice cream sundae of a stock, Wellpoint boasts a balance sheet with $8.4 billion more cash than debt!
CAPS member CoreAndExplore calls the stock "extremely cheap." ObliviousMF believes that "long term it will outperform." And ace CAPS investor nonzerosum calls the valuation on this one simply "excellent."
I agree. There's no logical reason this stock should trade as cheaply as it does, not even with lowered guidance (which TheWall Street Journal blamed for the stock's fall). "Erosion in the ... company's membership ranks," "pricing pressures," and even a potential change of control at the White House -- none of this explains Wellpoint trading at an enterprise-value-to-free-cash-flow ratio of just 3.5. Not so long as the company's still the biggest (or second-biggest, depending on how you measure it) health insurer in the nation.
My bet: Wellpoint is going to bounce right back, and probably sooner than later. Bargains this good just don't stick around for long. That's why right now, today, I'm publicly recommending Wellpoint to outperform on CAPS. Think I'm wrong?
Follow along, and find out.
The article 5 Superball Stocks originally appeared on Fool.com.The Motley Fool owns shares of WellPoint and Motley Fool newsletter services have recommended buying shares of WellPoint. 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. 311 out of more than 180,000 members. The Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. 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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