by Marc Bastow | August 29, 2012 12:22 pm
I try to shelter myself from the storm when starting off a conversation with “But you know all the news might be out, and it could be just about time to get into that stock,” and today is no different.
Battered, beaten, ripped, embarrassed and generally crushed stocks are the hardest to make heads or tails out of, since you never know if it’s the beginning of an eventual turnaround or the last stage in a failure.
And nobody wants to admit to a failure, especially investors who don’t can’t bear to take their money out, ever optimistic of a turnaround. The idea of “opportunity cost” — taking out your money to reinvest somewhere else — also is difficult, as investors face the fear of regret in the event the original stock improves.
With battered stocks, you see a lot of similarities: poor management, inflexibility, lack of innovation … maybe a touch of hubris. But each case has its own ripples, which sometimes include signs of promise. Here’s three companies where maybe — just maybe — there’s a glimmer of hope. (But fair warning: If you agree it’s time to dip a toe into these stocks, watch out for a little ribbing from your colleagues.)
InvestorPlace Editor Jeff Reeves’ personal whipping boy Hewlett-Packard (NYSE:HPQ) has so many ills … but the news is out there for all to see.
After an absurd number of changes in the front office, Meg Whitman is finally ensconced in the big chair, with her work cut out for her. The PC business is eroding, and HP said its PC business was down another 10% in the third quarter. While it still has a lead in laptop sales (16 million units between January and June), margins are slim and slimming. HPQ has given up on tablets, took a $10.8 billion charge in the last quarter (mostly on writing off its Electronic Data Systems purchase), and merging the PC business with the printer business is two wrongs not making a right. Worse: It’s using cash flow for the wrong reasons.
All that has led to nearly 70% losses since a multi-year peak in 2010, including 30% losses year-to-date. Plus, forward revenue and earnings estimates stink.
Here’s where the “but” comes in.
Hewlett-Packard has a huge installed base of operations and servers across so many sectors, including government, that it makes it unlikely they’ll be displaced anytime soon, even though that market also is slowing.
Despite its misuse of excess cash flow, Hewlett-Packard actually still has a cash flow, not to mention more than $8 billion still in the bank. Chris Lau at Seeking Alpha points out that HP’s software and networking revenues are growing, and the company continues to cut costs, upping the number of layoffs to 11,000 from an earlier 8,000 figure — and probably has more room to go on that front.
While Hewlett-Packard exited the tablet game, it understands that’s where the future is … and while it has no plans to make a more retail-geared tablet this year, it has said it will make an enterprise-focused tablet running Microsoft‘s (NASDAQ:MSFT) Windows 8. The company also is hoping the operating system will bolster its other hardware.
With a meager forward price-to-earnings ratio of 4, HP’s clearly a bargain on a valuation basis. And even if HPQ can manage to tread water, you’ll be rewarded with a 3%-plus dividend that seems in no danger of being taken out.
Talk about rearranging the chairs on the Titanic. Yahoo! (NASDAQ:YHOO) is in the same ocean as HPQ, right up to and including hiring a new face — this time, ex-Google (NASDAQ:GOOG) superstar Marissa Mayer. The difference is that Yahoo! has so much promise, but to date has squandered it away.
After establishing a brand name in the Internet space, the company let itself fall asleep while trying to figure out what to do next. Co-founder Jerry Yang made a mess of the best, muddling around with ideas that never came to fruition while never defining its role: original content provider or vessel for others’ content. Hence the foray’s with Livestand, CNBC, Alibaba, Axis, etc. But two of the biggest forehead slaps of the decade: turning down a buyout offer from Microsoft because it wasn’t enough money, then not buying Facebook (NASDAQ:FB) because of slowing momentum in earnings — in 2006, before it took off again.
Mayer has to figure out a way to recapture some of the content magic and sell it for a profit. I know, easier said than done. But the baseline is established: Yahoo! offers up an incredible array of content, including strong sports content; it’s still a big player in the email market; and Mayer already is starting to place her own people in management.
Yahoo actually isn’t as battered as you’d think. While YHOO shares aren’t half what they were in their early-aught heyday and are merely a fifth of their value at the 2000 peak, they’ve actually held up well since the financial crisis, trading mostly in a range around $15. That pales in comparison to, say, Google, but it’s hardly horrific.
Its forward P/E of 12 is realistic, and the company has a billion dollars in the bank, as well as plenty of free cash flow. Things need to turn around sooner than later, but the fresh face in the C-suite has me optimistic.
I’ve sounded off on Best Buy (NYSE:BBY) plenty of times, so let’s dispense with the niceties. Best Buy isn’t wholesale screwed, but it will be if the board doesn’t sell to Schulze.
Forget the figures. Forget the “strategy.” Forget about cost-cutting or “white knight” buyers. You’ve got one man who’s interested, so if he has the means, just let him.
Investors have to see that BBY is just like Circuit City and Tower Records: slowly circling the drain of a dead model. Best Buy peaked in 2006 at about $58 per share and never looked back, following a fairly steady (sans crisis dip and rebound) path to just 30% of that value (now $18/share). Heck, even if you bought stock a year ago at $30, you’re probably never getting that back.
So take what the market gives you and run! If Schulze and his investors come back after running the due diligence — and really, what is he going to find that he doesn’t already know about? — with an offer anything north of $24 per share, that’s a nearly 40% premium to what you can get today. There’s nothing to think about.
This isn’t a traditional turnaround strategy for investors, so don’t even look at BBY’s nearly 4% dividend. It’s buyout or bust — you’re either making money on a deal, or watching the stock’s eventual decline outpace the income, as long as it lasts. After all, a Chapter 11 stock has little shareholder value.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long MSFT.
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