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?
CAPS Rating (out of 5)
Corning (NYS: GLW)
Cliffs Natural Resources (NYS: CLF)
ImmunoGen (NAS: IMGN)
Dendreon (NAS: DNDN)
VIVUS (NAS: VVUS)
Four super falls -- one superball
No two ways about it -- Mr. Market gave investors a rough time of things last week. As the Dow shed 1.8%, and the S&P 500 dropped 1.5%, shareholders of more than 4,100 separate stocks exited the week poorer than they went into it. Some 230 stocks were literally decimated -- down 10% or more -- including all of the companies named up above.
Biotech seemed to get the worst of it, with ImmunoGen losing 17% Friday on reports of a huge quarterly loss -- $0.30 per share, or 25% worse than expected. That news seemed to spook investors in Dendreon (down 5% Friday, and 11% on the week), who sold off the stock rather than wait to hear how bad things get in Tuesday's earnings report. And VIVUS is still smarting from the European Medicines Agency's rejection of its obesity drug Qsymia.
But biotech wasn't the only sector to get hit. Mining investors weren't best pleased with Cliffs Natural Resources' report of an 86% drop in Q3 profit. And Corning -- which actually beat earnings on Wednesday -- did so while reporting weaker revenues, much reduced profits, and weak guidance on the quarter to come. Still, with the stock down 13% for the week, this has some investors wondering whether Corning might be a buy post-earnings?
So? Could it be?
The bull case for Corning
With a five-star rating on CAPS, it's clear a lot of folks think Corning is worth a look. CAPS All-Star TMFAwesome points out that, whatever you thought of the quarter, Corning remains "the leader in tablet and phone display technology, a massive growth industry" and added, "Gorilla Glass is now on a billion devices world wide."
CAPS' badducky agrees that this is a "big growth industry!"
And mwlove argues:
LCD prices are stabilizing, and capacity reductions will eventually lead to better margins there. Speciality glass, including Gorrila and Lotus, will be profit drivers in the future. Fiber optics will also come back in the future, as data carriers will need to expand capacity in the near future. Perhaps most importantly, Corning is a company that innovates; they will produce new products that people and business want. Add the great dividend, and you have a long-term winner.
And yes, if you look at the numbers the "right" way, you can certainly see why lots of investors would think Corning is a "buy" today. For example, the company has earned $1.9 billion over the past 12 months, and generated about $1.1 billion in positive free cash flow . Both numbers are close to what Corning achieved at the end of 2009 -- yet at $11 and change, Corning shares today sell for 40% cheaper than they did back then.
Don't get conned by Corning
Yet try as I might to have faith in Corning, the company lets me down time and time again. Take that free cash flow number, for example. For one thing, it continues to stubbornly lag reported income -- by about 40%, coincidentally. Worse, when I recommended buying Corning late last year, it was largely because the company had just finished churning out $2 billion in free cash flow. The way I saw it back then, if Corning performed as analysts were predicting it would -- growing its profits at 9% or so over the next five years -- the company could easily justify its $13 share price, and maybe even rise a bit.
Instead, here we are nearly a year later. Free cash flow has been chopped nearly in half, and analysts now say they don't expect to see Corning grow earnings at all anymore. Yet despite this, investors still seem willing to pay 16 times not-growing free cash flow for this company.
Me -- I'm not. I'm done. As of this writing, I'm officially closing my CAPS "outperform" call on Corning. And I've no plans to reopen it. Not until the company produces free cash flow in excess of reported earnings, maintains that free cash flow for several quarters running, and promises to grow it appreciably in future years.
In other words: never.
Want to invest in smartphones? Do yourself a favor -- forget Corning and instead buy Apple, which just sold 27 million of the things last quarter. Grab yourself a copy of our premium research report on Apple, and you can find out everything you need to know about Apple's new iPhone 5 and receive ongoing guidance as key news hits. Claim your copy today by clicking here now.
The article 5 Superball Stocks originally appeared on Fool.com.While he made the mistake of recommending Corning stock, Fool contributor Rich Smith does not himself own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 294 out of more than 180,000 members. The Motley Fool owns shares of Dendreon and Corning. Motley Fool newsletter services recommend Corning and ImmunoGen. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.