These fallen angels are about to rise again

 

Let’s take a little walk, shall we, down the market’s street of broken hearts and shattered dreams. At times like this, they can be found in almost every industry. Chinese internet? Crushed. Big oil? Crushed. High flying tech startup? Crushed. Concept restaurant? Well, you know. And it isn’t just one of the stocks in these industries that is suffering—it’s a great many, and in some cases all.

Too many, I say.

When every stock is falling, we know some of them are falling for no good reason. This is true for the same reason that when every stock is rising, we know some of them are rising for no good reason. While I’m happy to bring any special insight I have to this sort of work, none is really required today. When all stocks rise, some rise without justification, and the same is true when all stocks fall. Some of today’s ground balls — and foul balls — are really home runs in disguise, and I intend to find out which by looking at nothing beyond the publicly reported numbers. Meaning what? Read on…

 

Simple Value

While everything matters, you’ll find I tend to start any analysis by looking at a company’s PEG ratio. The PEG Ratio takes the P/E (the number other analysts talk about) and divides it by the company’s annual growth rate. As such, it translates the apples and oranges of P/E ratios into oranpples and applanges that can be compared side by side, sort of. Yes, a lot is left out, including balance sheet strength, profit margin, and more, but as I said, it is a place to start. As a historical note, Benjamin Graham, the father of value investing, believed a PEG ratio should be below 1 in order to denote value.

As in all cases, remember to consider these ideas as just that, ideas, and do your own research before investing.

 

Chinese Internet Contenders

Baidu (BIDU) — Down 38% from high
Qihoo 360 Technology (QIHU) — Down 41% from high
SINA (SINA) — Down 67% from high
Youku Todou (YOKU) — Down 57% from high
YY (YY) — Down 41% from high

In this category, YY appears to be the fallen angel most likely to rise again, based on its crazy-low PEG Ratio of 0.77. There is some long-term debt here, but nothing to moan about. If you are wondering what YY does, I encourage you do some Googling and read as much as you can. I envy the bizarre cultural disorientation you’ll feel as you tumble down this rabbit hole. Suffice to say, it doesn’t get any weirder than this.

YY

Chart courtesy of www.stockcharts.com

Big Oil Contenders

Exxon-Mobil (XOM) — Down 27% from high
BP (BP) — Down 59% from high
Total SA (TOT) — Down 49% from high
Chevron (CVX) — Down 36% from high
Royal Dutch Shell (RDS-A) — Down 50% from high

Unsurprisingly, none of these companies have positive earnings growth, and if there is an angel in this bunch, its well disguised. I’m calling an audible and going with Phillips 66 (PSX), once the refining arm of Conoco Phillips (COP). PSX is down 15% from its high, which it hit in November of last year. The company’s PEG ratio of 1.76 isn’t going to win any awards, but at least it is pointed in the right direction. It appears that the stock has retrenched in sympathy with the market, and for no other good reason, making this exactly the sort of stock I’m looking for today.

PSX

Chart courtesy of www.stockcharts.com

Tech Startup Contenders

Fitbit (FIT) — Down 69% from high
GoPro (GPRO) — Down 89% from high

Each of these companies makes a high-tech product that has a hard-core following and which many people seem to like, although neither now appears to be as world changing as it once did. Both stocks rose to preposterous highs on unrealistic visions of those changed worlds. But those worlds never came, and the Street has been punishing them mercilessly.

I’m breaking from the pattern again, I know, but both of these stocks now look like amazingly good buys. Both companies have solid profit margins, particularly GoPro, and both have rapidly growing sales, particularly Fitbit. However you responded to the Street’s positive irrationality towards these stocks, you might as well take advantage of its negative irrationality.

GPRO

FIT

Charts courtesy of www.stockcharts.com

Concept Restaurant Contenders

Noodles & Company (NDLS) — Down 71% from high
Potbelly (PBPB) — Down 65% from high
El Polo Loco (LOCO) — Down 71% from high
Shake Shack (SHAK) — Down 63% from high

Why did people buy these stocks? I was not the only analyst screaming that they were overvalued, and in this case, they all remain overvalued, even at current prices. Paper thin (or negative) profit margins, earnings declines, gruesome valuations, etc. Noodles & Company, by way of example, has a PEG ratio of 87 — I wonder what Benjamin Graham would have to say about that. What’s strange is how similar these stock stories all look to each other — I mean freaky similar. Not only are NDLS and LOCO both down 71% from their highs, but they are both now trading at $11.59 per share. This is like one stock with four names. It’s a four-headed dog, and you should stay far away.

And yes, for the third time out of four, I didn’t supply a single winner from my list of contenders, and that’s because I don’t always find what I expect when I dig into a company’s numbers. My advice — beware of anyone who does.

Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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