There are a lot of once-highflying stocks that have fallen below $10 and look ripe for the picking. But just because a stock is trading in the single digits doesn’t make it a bargain.
A stock may have fallen out of favor for a variety of reasons, be it a product of a slowing economy, the credit crunch or fierce competition. Likewise, there are a lot of things to consider before jumping into a low-cost stock.
The auto maker’s stock has been hammered down to around $6, a mere fraction of the $38 it was nine years ago, and the auto maker just announced plans to quickly shift its truck plants to car plants and accelerate its turnaround plan. But it’s only attractive on a valuation basis – Ford said it won’t be profitable until 2010 at the earliest.
“An investment in Ford today feels like being in the wrong place at the wrong time,” says John Schloegel, vice president of investment strategies at Capital Cities Asset Management.
There’s no quick fix for Ford’s current problems, adds David Twibell, president of wealth management at Colorado Capital Bank. Ford “has an aggressive turnaround plan [but] they don’t necessarily have a history of successfully implementing such plans,” he says.
One way to tell a stock is headed for the bargain bin is that it continues to make “lower highs.” In order for it to become a good buy, says Greg Womack, president of Womack Investment Advisers, something has to break that cycle. Ford stock recently tried to break out of its downtrend but snapped back below its 200-day moving average.
When it comes to the auto industry, “Hold your nose, wait three to five years, and you’ll have a winner!” Womack says.
Another stock that may look like a bargain is Sprint Nextel, which has lost 90 percent of its value since the tech bubble peaked in 1999 and is currently trading around $8. There’s been a lot of buzz in the wireless industry, with talk of a possible Verizon-Alltel deal, and Sprint appears to be a downtrodden player on the way up, particularly given its recent deal with Clearwire to develop faster networks. But earnings have plunged 88 percent in the past year alone and are expected to slip into the red by the end of next year.
Sprint “spent the last decade expanding an excellent next-generation network in terms of bandwidth, only to have fewer and fewer people using it,” Schloegel points out.
(For more insight on stocks under $10, click on the video link at left.)
Stocks like Ford and Sprint seem like a good deal, but when you look at their business, Womack says, they’re just not backlogging orders.
Still, there are bargains to be had for under $10.
We ran a stock screen, searching for stocks with market caps over $1 billion and a PEG ratio, which considers estimated earnings growth as well as value, as close to zero as possible without going under. A PEG ratio is literally the price-to-earnings ratio divided by the annual earnings-per-share growth rate. You want the lowest PEG ratio possible because it shows the company has a lot of growth potential but it's not yet priced into the stock, hence making it a good value.
Of course, there's more to stock picking than just value and growth, so we took our picks to some strategists and money managers to find out if they're a bargain or just cheap stocks.
CIT Group is a subprime home and commercial lender that came thisclose to falling victim to the credit crunch in March. The stock has plunged 85 percent in the past year and is currently trading around $9 a share. CIT lost $1.35 a share in the first quarter, missing hugely, but is expected to eke out a profit of eight cents a share for the year after raising billions in capital, including a $3 billion long-term financing agreement with Goldman Sachs. Earnings are expected to rocket to $1.40 a share and $1.78 a share, respectively, in the next two years, according to Thomson Reuters. Its PEG ratio is zero.
There are five holds, five buys and two strong buys on the stock, according to First Call, and the consensus price target is $16.
CIT “will be a survivor of the subprime fallout,” says Michael Cohn, chief investment strategist at Atlantis Asset Management, who advises waiting until the end of the third quarter to buy CIT.
Still, it’s not for the faint of heart.
“CIT scares me,” Twibell says. But “some pretty smart investors have … started dipping a toe back in here and it might make sense for individuals with strong stomachs.”
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Tenet Healthcare operates more than 50 hospitals, mostly in the south. The stock is down 70 percent since January 2004, trading below $6 a share, as the hospital sector has taken a hit from a rising number of uninsured patients and bad patient debt, conditions that could escalate if the economy worsens. But Tenet, compared to some of its counterparts, has made progress over the past few years in its turnaround effort and analysts say it looks like it’s on a sustainable growth trajectory, with earnings projected to be flat this year but grow to 9 cents next year and 22 cents the following year, according to Thomson Reuters. Its PEG ratio is 0.01.
There are two underperform ratings, four sell, nine hold and two buy ratings on the stock, according to First Call, and the consensus price target is $5.92.
Tenet Healthcare “is by no means a valuation play, but instead a risky way to play the rebound in health-care-facility stocks which are coming off a decent quarter,” Schloegel says, advising that only aggressive investors jump in now.
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Motorola has taken a fast, hard fall, with the stock plunging 65 percent since October 2007, as the Razr lost its luster and the handset division got left in the dust by Apple and its does-it-all iPhone. The company is expected to spin off that division, which has lost $1.6 billion since January 2007, if it can. Some analysts say the best thing would be to just shutter the division, especially since the company still has a lot going for it, like its semiconductor, home and networks divisions. Earnings are projected at four cents a share this year, but expected to surge to 40 cents a share and 79 cents a share in the next two years, according to Thomson Reuters. Its PEG ratio is 0.02.
There are 1 underperform, 1 sell, 17 hold, four buy and four strong buy ratings on the stock, according to First Call, and the consensus price target is $11.98.
Investing in Motorola is “dead money until some visibility as to who is going to lead this company out of oblivion” emerges, Cohn says.
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Dynegy is a wholesale-power supplier for municipalities and other energy companies in 14 states from coast to coast. The company nearly collapsed after the 2000 energy bubble burst but analysts have cheered CEO Bruce Williamson’s leadership and the company’s diversification efforts. The stock plunged 37 percent in the second half of last year but has clawed its way back in 2008, trading around $9 a share, and analyst projections indicate it still has further to go, especially given its diversification efforts in the past year. Earnings are projected at 21 cents a share this year, then more than double to 45 cents a share next year and 51 cents the year after, according to Thomson Reuters. Its PEG ratio is 0.18.
There are four hold, five buy and two strong buy ratings on the stock, according to First Call, and the consensus price target is $10.45.
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Interpublic is a group of advertising and marketing agencies that traces its roots back to one of the very first ad agencies, Foote, Cone and Belding, founded in 1873. Its clients include Unilever, Home Depot and NBC Universal, parent of CNBC. The company has had a rough decade and the stock fell more than 50 percent in the three years following its peak near $17 in early 2004. Analysts say the firm’s turnaround effort seems to be taking a hold and the stock has bounced from a bottom of $7.40 at the start of the year. It’s currently trading above $9 a share and analysts think it still has further to go. Earnings are projected to grow 85 percent over the next three years as existing clients are increasing spending and new clients are being added. Plus, IPG owns a small stake in Facebook estimated at $75 million, which could prove to be very valuable if the online-networking site goes public. One caveat: The outlook for the advertising industry is shaky. Analyst peg earnings at 46 cents a share this year, followed by 65 cents and 85 cents in the next two years, according to Thomson Reuters. Its PEG ratio is 0.46.
There are three hold, three buy and three strong buy ratings on the stock, according to First Call, and the consensus price target is $11.67.
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When it comes to investing in stocks under $10 you have to look at a company’s fundamentals but also the trends.
“Most stocks under $10, in general, are idea stocks,” Cohn says. He advises looking at other companies in the industry – are they going up? Let’s face it: There are no bargains in a dead industry.
The other advantage of taking a look at the whole industry is to find out whether or not the firm is keeping up with competitors. A stock like Motorola may seem cheap but if it’s getting steamrolled by its rivals, it’s not a bargain.
“You need to make sure the company you’re investing in is in control,” says Harley Kaplan of Beta Industries, an independent financial-advisory firm in Sherborn, Mass. “If not, they’re doomed.”
Perhaps one of the most important things to remember is to find a good entry point.
“Make sure all the sellers are out,” Womack says, and that you’re seeing the stock start to break into a pattern of higher lows.
And, remember who you’re dealing with: A $5 drop in a stock like Google is nothing. For a $10 stock? That’s 50 percent.
“If it breaks down more than 10 percent or more – get out,” Womack advises.