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?
Five super falls -- one superball
With the S&P 500 dropping 1.6% over the course of last week's trading, you might expect that quite a few stocks got hurt pretty bad ... and you'd be right. In fact, nearly 5,400 separate companies exited the week lower than they entered it.
Some stocks did particularly badly, however -- much worse than the average. The five named up above, for example, have all been literally decimated, losing 10% (or more) of their market cap over the past five trading days. So what went wrong?
Well, right off the bat, we can see that last week was a bad week for folks involved in the commodities trade -- and particularly in the production and transportation of coal. Four of the five stocks listed above fit this bill, with both Arch Coal and Walter Energy being involved in the production of coal, and dry bulk shippers Diana and DryShips being involved in coal's shipment across the oceans.
Prices for thermal coal (used for producing electricity), as you can see in this chart, have been weakening since reaching a near-term peak back in early May -- and they just plain fell off a cliff last week.
Investors, who continue to rate these four stocks a modest three stars on Motley Fool CAPS, don't appear quite ready to toss coal stocks overboard just yet. To the contrary, it's likely that at least some opportunistic coal investors will take the perverse (but often right in the long-term) view that a drop in coal prices will increase the commodity's attractiveness to energy utilities -- and help to increase demand for coal (and coal stocks) going forward.
And speaking of the long term ...
On the other hand, there's one stock on this week's list that clearly is not like the others. A stock that has nothing whatsoever to do with coal, and a stock that, with a five-star rating on CAPS, appears to hold every promise of making for a good investment both in the long term and perhaps in the short term as well. InvenSense is its name, and supplying smartphone makers with semiconductor-based motion-sensors is its game. Let's find out a little bit more about it, with help from our trusty team of CAPS investors/volunteer stock analysts.
CAPS member ABigelow sees InvenSense as a way to "ride the iPhone money train" and adds, "As the iPhone goes, so goes InvenSense."
What's more, meanjeanslo points out that "if iPhone 6 continues to break records, this component maker should be hitching a ride." Our CAPS All-Star goes on: "Plus, it's likely their chip is in the watch." So for now at least, worries that InvenSense is about to lose its key customer appear to be overblown.
For that matter, even if there is some truth to the rumor that InvenSense's favorite customer is pursuing a "dual-sourcing strategy," so as to not be wholly dependent on InvenSense for its motion sensors, CAPS member chadk reminds us that InvenSense also counts Samsung as a customer, and that whoever it sells to, "the growth of mobile phones globally should make this stock pour in profits for years to come."
Of course, a good first step to proving chadk right -- and ABigelow and meansjeanslo as well -- would be for InvenSense to return to earning some profits. According to S&P Capital IQ figures, InvenSense recently broke a six-year streak of posting positive profits and is now showing negative earnings for the past 12 months.
Granted, it was only InvenSense settling litigation with rival STMicroelectronics earlier this year, and incurring a $15 million charge to earnings as a result, that pushed InvenSense into this loss. But even if it had held on to every dollar of that settlement, InvenSense would still have been free cash flow-negative for the past 12 months.
What's more, free cash flow levels at the company actually seem to have peaked back in 2012 and have not yet returned to those levels. And even if they do, then valuing the company on the $42 million in positive free cash flow it generated in 2012 puts InvenSense stock at a pretty pricey valuation of roughly 40 times FCF today.
Long story short? InvenSense is very likely to bounce back from its recent "negative" score on GAAP profits. Investors betting on such a bounce-back may well be rewarded when it happens -- and this may help to explain InvenSense's current five-star rating on CAPS. Longer-term, however, the company really does need to start generating substantial free cash flow if it's to deserve the $1.7 billion market cap that Wall Street is currently valuing it at.
Apple Watch revealed: The real winner is inside
Apple recently revealed the product of its secret-development "dream team" -- the Apple Watch. The secret is out, and some early viewers are claiming that its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts that 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see where the real money is to be made, just click here!
The article 5 Superball Stocks originally appeared on Fool.com.Fool contributor Rich Smith does not own, 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. 360 out of more than 180,000 members.The Motley Fool recommends and owns shares of Apple and InvenSense. 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.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.