A Look at What’s Not Working in this Market
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 (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.
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.
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.