Money Matters - Simplified

Get Ready for the Bounce


"Don't catch a falling knife," as the old saw commands. (Pardon my mixing a cutlery metaphor.) The idea of buying a former superstar stock at a discount price certainly has its attractions, but you've got to make sure you catch the haft -- not the blade. That's where Motley Fool CAPS comes in.


Today, we once again stand beneath Mr. Market's silverware drawer, measuring which knives have fallen the farthest. Then we'll call on CAPS to ask which of these stocks -- if any -- Foolish investors believe are ready for a rebound. Let's meet today's list of contenders, drawn from the latest "52-Week Lows" list at WSJ.com:

Company

 

52-Week High

Recent Price

CAPS Rating

(out of 5)

Genco Shipping (NYSE: GNK) $26.49 $14.24 *****
General Maritime (NYSE: GMR) $8.82 $3.18 ****
Clearwire Corp.  (Nasdaq: CLWR) $8.60 $5.21 ***
Evergreen Solar  (Nasdaq: ESLR) $1.87 $0.60 **

Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Friday last week. 52-week high, recent price, and CAPS ratings from Motley Fool CAPS.

If there were ever a time of year you could use some extra coin a-jingling in your pocket, it's Christmas. Sadly, a lot of investors saw their coins lost among Mr. Market's sofa cushions last week when their stocks settled down to new 52-week lows.

Beginning at the bottom, Evergreen Solar is still shedding needles in the wake of its announced plans to recapitalize the company with a new round of debt financing. Last week's reports that European subsidies for solar power plants are being cut back didn't help matters much. Result: Never a particularly strong performer, Evergreen is once again back in penny-stock land.

Debt's also the problem at Clearwire. Earlier this month, Clearwire added $1.3 billion to its debt load in an attempt to tide itself over till the 4G revolution takes hold. The company's massively leveraged and currently burning about three times its own market cap's worth in cash each year. The hope was that Sprint Nextel would come through for shareholders, buy Clearwire, and save its investors from their mistakes. No such luck. Last week, Sprint confirmed it's standing pat at a 54% stake in Clearwire and has no intention of buying more.

Now here's the crazy thing -- "debt" seems to be the big theme this week, right? Evergreen and Clearwire have got it, and investors don't like it. Yet, the two highest-rated stocks on today's list -- oil tanker General Maritime and dry-bulk hauler Genco Shipping -- are both arguably more leveraged than either of these companies. So why is it that investors seem willing to forgive General-M's flaws, but not Clearwire's? Why are they positively giddy with excitement to own five-star-rated Genco?

The bull case for Genco Shipping & Trading
I can't say as I understand the reason for optimism about money-losing General-M ... but as for Genco Trading, it's patently obvious: The stock looks cheap.

And I mean dirt cheap; it's 3.3 times earnings cheap (and 5.2 times next year's earnings). CAPS member shaileshnita calls this a "great" price for Genco and also points out the attractiveness of the company's other metrics: "Return on Equity=15, P/B=0.53." (To be clear, these metrics do fluctuate over time. For example, as of today Genco's ROE is a bit lower than shaileshnita states, its price-to-book ratio -- a bit cheaper.)

Still, as CAPS investor Option1307 points out, "GNK has some of the better valuation metrics relative to the rest of the sector." Dry shipping flagship DryShips (Nasdaq: DRYS), for example, costs 28 times trailing earnings today, while Eagle Bulk (Nasdaq: EGLE) will set you back 12 times earnings, and even Diana Shipping (NYSE: DSX) fetches an 8-times multiple.

And yet, mightn't Genco be "cheap for a reason"? While bullish on the company, CAPS member mattcguy acknowledges there are risks in this stock: 

The Baltic Dry Index has dropped 50% since September, and is at a very low level by historic standards. Also, GNK has a lot of long term debt which makes the stock risky and particularly vulnerable to an economic slowdown. These are the reasons why the stock is not loved right now and is trading at a 52 week low.

Regardless, mattcguy is of the opinion that "the future growth of GNK will exceed market expectations ... [which] are VERY low right now."

Prepare to board?
And he's not the only one. Why, just last week, Fool analyst Paul Chi went on record calling Genco "outright cheap" -- priced so low that essentially any good news at all could send the shares flying and close the valuation gap with its peers.

As for me, I'm not necessarily saying that I disagree with my Foolish colleagues. I'm just saying that this stock scares me spitless. I mean, over the past 12 months, Genco has burned through $674 million in cash. And while I admit that the Great Recession hasn't exactly been "great" for the shipping business, just take a look at how Genco fared in the years when business was booming for commodities shipments and their shippers. From 2005 through 2009, for example, this company somehow managed to burn through more than $1.2 billion in free cash flow -- despite floating in the middle of the biggest commodities boom in recent memory.

Foolish takeaway
I like companies that do well in good times. I love companies that can figure out how to prosper even in lean times. Sadly, Genco looks to me like the kind of business that can do neither. Whatever the economy -- Genco fails to profit from it. And for me, that's just not the kind of stock I want to own.

© 2010 UCLICK L.L.C.