Investors eager to rummage through Wall Street's bargain bin will find plenty of merchandise to choose from.
Among the Standard & Poor's 500, there are 23 stocks trading for $10 or less — and they include some well-known companies such as Ford Motor F, Sprint Nextel S, Motorola MOT and Office Depot OTD. There's also no shortage of beat-up financials in the group, such as Washington Mutual WM E-Trade Financial ETFC and Freddie Mac FRE.
And to some, the rising ranks of stocks with cut-rate price tags is another sign of how there are bargains to be found. "The number of companies that are cheap enough for us to consider is higher," says Scott Barbee, portfolio manager of the Aegis Value fund.
Some say the availability of deals is at historic levels. "The market has really gotten inexpensive," says Barbara Marcin, portfolio manager of the Gabelli Blue Chip Value fund. The Standard & Poor's 500-stock index is trading for 13.0 times its expected operating earnings per share over the next 12 months. When the stock market peaked last October, the S&P traded at 21.1 times actual future earnings per share.
And that has investors, who are evaluating some of these stocks, thinking they might have a shot at buying stocks that will skyrocket twice or more in value. "Some of these stocks are doubles and triples," says John Schneider, portfolio manager of the Touchstone Large Cap Value fund.
Are these stocks huge bargains or just Wall Street's versions of poorly made sweaters about to unravel?
Buying beat-up stocks has a mixed recent track record. Last year, there were nine S&P 500 stocks trading for less than $10, and most are still languishing. And a low share price doesn't necessarily mean a company is cheap. Sixteen of the 23 stocks under $10 don't have price-earnings ratios because they've lost money the past 12 months, says Standard & Poor's Capital IQ. Another five have steep P-Es of 20 or more, because their earnings have fallen faster than their share prices.
But if you go back further, it's clear that scooping up deeply discounted stocks can be very lucrative. Five years ago, there were 42 current members of the S&P 500 trading for less than $10; they're up 439% on average and include some of the best turnarounds in recent history, including Apple, which is up 1,573%.
The financial wreckage
Financial institutions, including lenders and brokers, are easily the No. 1 big-company victims of the bear market.
Eight of the 23 sub-$10 stocks are financials, including the cheapest member: E-Trade. The battered financials also include Washington Mutual and National City NCC, down more than 80% from their highs the past 52 weeks. And it probably doesn't come as a surprise that companies at the center of the credit crunch, such as Freddie Mac and mortgage insurers MGIC MTG and MBIA MBI, are in the list. On Wednesday, Freddie reported its fourth-straight quarterly loss.
The pessimism targeted at financials is overdone and creating nearly once-in-a-lifetime opportunities, says Schneider. He's bought shares of National City and Freddie, because he believes that the companies have plenty of access to capital to weather the storm.
But the dangers are not to be underestimated, says Kent Croft, manager of the Croft Value fund. Croft made a big bet on battered Citigroup C in the early 1990s, which proved to be one of the fund's best-ever investments. But with banks hitting investors with unexpected write-downs of their asset values, the perils this time are larger, he says. "You're in a crisis situation right now. Financials now are in some ways unanalyzable," he says. "Because of that added difficulty, things can go down further."
Another major grouping of battered stocks includes firms going toe-to-toe with dominant competitors. Sprint Nextel has to deal with wireless industry giants AT&T ATT and Verizon VZ. Motorola faces Research in Motion RIMM and Nokia NOK Office Depot is taking on office-supply giant Staples SPLS. And Advanced Micro Devices AMD must contend with Intel INTC.
Corporate also-rans get a free pass during bull markets when investors are willing to give them up to 75% of the valuation of the industry leaders, Marcin says. But when the economy slows, investors gravitate to the industry leaders and punish those losing market share.
The special situations
Then there are companies like health care facility operator Tenet Healthcare THC and utility Dynegy DYN that have company-specific management or business challenges. And there are companies facing industry-specific challenges, such as Ford, which is trying to retool operations away from large SUVs amid soaring gas prices. Shares of Novell NOVL, a computer networking software maker, continue to fall as the company attempts to migrate customers to newer products.
And that's the big risk: A cheap stock can get even cheaper as the business deteriorates. A stock may "look statistically appealing, and investors (are) seduced by it," says Matthew Kaufler of Clover Capital. And that's the danger, he says, of buying a stock "because of a price decline and nothing beyond that."