Last year has been a pretty volatile one for the equities. Driven by the double-dip recession rumors and eurozone concerns, several stocks suffered significant losses. Interestingly, most of these hard-beaten stocks are on the bounce, since January. I think the losers of 2011 are likely to be the winners of 2012. The sector wise performance analysis of the equity markets supports my hypothesis. Since January, financials performed the best (14.4%), followed by industrial goods (12.9%), and conglomerates (11.8%).
While most of the hard-beaten stocks are rising on high-volume, I noticed 5 stocks that failed to show signs of recovery. These stocks could be great picks for contrarian investors. Therefore, it is worth to investigate them further. Let's see what is keeping these stocks depressed, and whether they are worth to consider after making significant losses in the last year.
Sprint (S)
Sprint is among the biggest looser of the last year. After its market cap is slashed by 50%, the stock found itself a very strong support at $2. Since October, it is trading slightly above its support level.
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From a technical perspective, Sprint shows a pattern similar to Bank of America's (BAC). When Bank of America was trading near its support of $5, I suggested it as a speculative buy, since it was trading above a very strong support level. I think Sprint is likely to follow Bank of America's steps, making a huge gain in an unexpectedly short period.
From a fundamental perspective, investing in Sprint is riskier than investing in Bank of America. Sprint has a gigantic amount of debt that has to be paid sooner or later. Morningstar suggests Sprint as a four-star company, but notes the following
Backed into a corner, the firm was forced to accept costly terms on its recent $4 billion debt offering.
Sprint's management has little room for error -- particularly when it comes to reorganizing its debt. The stock is trading at half of its book value, but that should not deceive the investors. After accounting for intangible assets, the tangible book value per share is negative. So, shall we buy or sell Sprint? I would say buy some, but not much. It could be a good speculative play.
Frontier (FTR)
Frontier is another telecommunication service provider that has been on a free fall for a while. The stock disappointed its shareholders with a yearly negative return of -44%, and it still keeps going down. Last week has been an exceptionally bullish one for the stock, as it returned 18% in 5 trading days. However, the year-to-date return of -7% is still in the negative territory.
Frontier offers a magnificent yield of 15.7%, but the payout ratio from earnings is 500%. Another reason for the double-digit yield is the reduction in stock price. Given the high amount of depreciation and amortization expenses in the balance sheet, it would be a good idea to look at Frontier's cash flow statement. Frontier generated a net cash flow $1.6 billion from its operations. $921 million of this cash flow is used for investment activities (capital expenditure). The free cash flow generated by the company amounts to $662 million. The company paid dividends that amount to $746 million, which is slightly above the free cash flow generated by the company.
I am still not sure whether Frontier's yield is sustainable, as the company has around $1.5 billion in current and $11.2 billion in long-term liabilities. Similar to Sprint, Frontier's balance sheet includes an extravagant amount of goodwill and other intangible assets. Excluding these invisible assets, it has a negative book value. I would not buy Frontier for its yield, but I think Frontier is ready for a big bounce in 2012.
Alpha Natural Resources (ANR)
Alpha Natural is one of the leading coal miners in the U.S. The company operates several mines and coal preparation plants in Appalachian and Powder River Basin regions. Its customers include steel-processors, manufacturing industries, as well as energy producers.
Alpha Natural has a relatively clean balance with a debt/equity ratio of 0.36. After its market cap is slashed by almost 60% in a year, the stock is trading well-below its book value. Analysts are bullish about the company though. They expect a double-digit EPS growth over the next 5 years. If their estimates hold, Alpha Natural can be an outperformer. Barclays has an overweight rating with a target price of $32, implying more than 50% upside potential in middle-term.
Arch Coal (ACI)
Arch Coal is another coal miner that disappointed its shareholders. Similar to Alpha Natural, the stock's market cap is slashed by almost 60% in a year, and it is trading below the book value. At a price of $14, Arch is trading near its 52-week lows.
While, the trailing P/E ratio is 18, the forward P/E ratio falls to 7.2. The company offers a yield of 3.1% supported by payout ratio of 60%. Arch Coal has some debt issues, but the regular cash flow is strong enough to pay its short-term and long-term debts. After all, Arch Coal is a profit maker, with retained earnings that amount to half billion dollars. Similar to ANR, Arch Coal could be a good one to play the coal price recovery.
Hecla Mining (HL)
Established in 1891, the Idaho-headquartered Hecla Mining is one of the largest silver producers in the U.S. While Hecla has several mining assets spread across North America, it primarily operates in two main mining fields. The Greens Creek Unit provides not only silver, but also gold.
I am not a fan of precious commodities, or the related stocks. However, after losing more than half of its market, Hecla looks like a good deal. The stock is trading at a trailing P/E ratio of 12.55, and P/FCF ratio of 7.8. It is trading with a slight premium over the book value. However, Hecla has a rock solid balance sheet with negligible debt compared to assets.
At the middle of last year, when the stock was trading above $8, I was bearish on Hecla mining, and suggested avoiding the stock. The extremely high P/E ratio of 62 was not justified by any valuation metric. Since then, the stock lost near half of its market cap, while earnings increased significantly. At a price of $5, Hecla is priced significantly below its heyday valuation. It could a good addition to the speculative portion of your portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
