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Published: June 8, 2010
A number of stocks are hitting new lows for
2010 this week, and an increasing number are also hitting
52-week lows. In fact, more than 100 stocks hit 52-week lows on
Tuesday for the first time in more than a year. The rising list
of laggards is surprising considering we just came off of a very
robust
earnings season.
Some are simply drifting lower in this challenging market, while
others certainly merit a sell-off. Here’s a look at some stocks
that hit 52-week lows on Tuesday, but which should move back up
when buyers re-take charge of the market.
AOL
AOL (NYSE: AOL) went public at $25 a share last November,
and after a recent march toward the $30 mark, touched almost $20
on Tuesday, an all-time low. You would think this
IPO would have fared well, as advertising rates on websites
have started to firm up after declining for several years. But
the company has admitted that its sales force was not meeting
expectations, and a recent re-shuffle of the sales team is
expected to yield improved results by the fourth quarter, which
coincides with the peak selling season for Internet ad sales.
Moreover, investors have had a hard time understanding the
potential synergies for a mishmash of web properties. But those
websites are still throwing off considerable
cash flow, and along with recent asset sales, should help
AOL to show a very strong
balance sheet later this year. Right now, AOL has $262
million in net cash [which will rise to $450 million when the
ICQ (instant messaging) sale is complete], and is generating
$100 million in
free cash flow every quarter. With a market capitalization
of $2.2 billion, and an
enterprise value of $1.75 billion, shares now trade for
around four times annualized free cash flow.
But can that cash flow be sustained? AOL’s dial-up internet
access business continues to slowly shrink year after year, and
will reduce cash flow generation by about $20 million annually.
The challenge is for AOL to get its broad base of web properties
to make up the difference. The sinking share price tells you
that it’s too tough a hill to climb. Indeed, many expect AOL to
further trail the pack of the leading website operators. But AOL
is still the fifth-largest platform in the world in terms of web
traffic, and many of its sites are fairly new and only now
reaching
critical mass.
Action to Take --> In a
worst case scenario, shares are probably going to stay stuck at
this level. It’s hard to see them going much lower in light of
that prodigious cash flow. And if the company can start to make
real inroads in terms of Internet ad revenues later this year,
then shares could easily move back toward the $30 mark.
Arcelor Mittal
Shares of
ArcelorMittal (NYSE:
MT), the world’s
largest steel maker,
have lost nearly
half their value in
the last 10 weeks.
Investors are
concerned that the
Chinese economy may
soon slow, which
would compel Chinese
steel makers to
flood the market
with cheap steel.
But that hasn’t
happened as feared
just yet. Investors
are also shedding
exposure to the
sector on fears that
European economic
troubles could crimp
demand.
But as Goldman
Sachs (NYSE: GS)
noted in a recent
note to clients,
ArcelorMittal has
almost zero exposure
to Europe. The
analysts add that
the steel maker has
the lowest costs in
the industry, the
highest level of
vertical integration
(which shields it
from price spikes in
raw materials), and
has a high degree of
exposure to the
emerging economies
that are showing
robust growth right
now.
Action to Take
--> Since
the Goldman analysts
predicted shares
would double back on
May 26, they’ve
fallen another -15%.
It’s pretty clear
that shares reflect
a worst-case
scenario, and it’s
not at all clear
that such a scenario
will come to pass.
Charles Schwab
Shares of Charles
Schwab (Nasdaq: SCHW)
touched a fresh
52-week low on an
intra-day basis, and
are now as cheap as
they were back in
2006 (excepting the
period back in March
2009 when all stocks
temporarily
plunged). The key
difference between
then and now? The
online broker and
asset manager now
has about 40% more
clients than five
years ago. Much of
that growth has come
from stock brokers
and financial
advisors who
defected from the
major brokerages and
moved to smaller,
independent shops.
You’d never notice
the sharply rising
client base by
looking at Schwab’s
income statement.
Simply put, the
company is not
generating as much
revenue from clients
as before, largely
since its money
market funds have
been operating at a
loss while interest
rates hover near
zero. Yet as rates
rise, Schwab should
start to once again
generate nice profit
spreads on its
funds. And with many
more clients in the
fold, Schwab could
post record results
once interest rates
are back to
historical levels.
Action to Take
-->
Analysts are
modeling for +25%
sales growth and
+70% profit growth
under the assumption
that rates will
begin to rise. If
the economy stays
weak, that forecast
may need to be
pushed out into
2012. Yet one way or
another, investors
will eventually see
that Charles Schwab
continues to build
an impressive base
of clients – even if
its stock price is
telling you
otherwise right now.
-- David Sterman
Staff Writer
StreetAuthority |
