In today's stock market, the rumor mill matters more than the actual company profit, and the penny per share estimate beat or miss matters more than the actual cash flow stream or company book value. It's worse than high school, and it makes me sick to think of it with all of the fluff and hit pieces being batted around the Internet by those with hidden agendas or people talking their book. Sometimes I wonder whether any of the TBTF "big shots" actually have anything to talk about besides themselves at dinnertime.
Gone are the days when stocks were valued based on tangible assets per share or some reasonable price to free cash flow multiple. Today, stocks are seen as gambling slips where the horse with the most outspoken jockeys and slickest talking managements go higher, while the Secretariats of the world with real earnings and book values are tossed aside like so many lottery tickets that never paid off.
If a good company at a cheap valuation misses one tiny earnings estimate whisper number and commands a PE ratio of 7X, that stock is punished in illiquid, manipulated after hours trading. Meanwhile, when Amazon (AMZN) misses earnings and profits drop by a full 30% plus, the stock is pushed by the HFT Elevator all the way to the penthouse suite and beyond. Don't be fooled by the runaway charts or the Fed speak; many names that are loved today will sell off the hardest tomorrow, and vice-versa.
Here are 20 stocks the so called "experts" love to hate, and why you should buy from the panicking weak hands on severe sell offs.
Research in Motion (RIMM) -- No company is currently as hated as Research in Motion by the industry's talking heads these days. Everyone and his rich uncle has bad things to say about this phone company that, get this, has a grip on the business community and its use of smart phones, which is rapidly being challenged by the likes of Google (GOOG) and Apple (AAPL) whose products are incredibly more superior to RIMM's.
We have heard the same story quarter after quarter, yet RIMM still grows and earns free cash flow and more and more profit. By Ben Graham's model, a company with no growth at all should be worth 8.5X earnings. RIMM affirmed in after hours that 2011 earnings will grow by 18% percent to $7.5 per share, even though profit was being moved from the first half of the year to the second half, but the tech experts hit the sell button and the Internet message boards howled with the "I told you so's" all afternoon.
The bottom line is that RIMM has a five-year historical growth rate that is unmatched. The same "experts" who loved this stock when it traded for 50X earnings pre-financial crisis now hate the stock at 6.9X earnings. RIMM is not without risk, but those who believe that this company is somehow too big to grow because it holds share in corporate America are nuts -- RIMM is a $29BN company while Apple is well over 10 times larger.
Renesolar (SOL) is a cheap solar name trading for around 4X forward earnings. The company is absolutely hated, as are all of the other Chinese solar stocks ... likely out of some type of patriotic bend or pro-oil company agenda rather than any fundamental value-based reason for avoiding the name. True, Chinese companies face different risks due to the regulatory and political landscape, but surely the same talking heads should then paint Baidu (BIDU), etc. with the same brush of skepticism. Of course, the "experts" do not -- everyone loves the bubble names and shorts the names that are the cheapest. Somehow risking it all senselessly is the only axiom that makes sense in today's stock market.
Hanwha SolarOne (HSOL) -- Again, a company trading for 4X earnings with outstanding growth. If this is another Chinese fraud, why are the "geniuses" on Wall Street buying BIDU at 40X revenue? Selling the June $8 call option against your stock makes a good deal of sense for those who like cheap stocks but hate the risk that is associated with the HFT Manipulathon 3000.
JA Solar (JASO) -- The most hated solar company on Earth, and arguably the best investment in the space for the next decade. JA Solar is the largest solar panel maker in China, trades for around 4X earnings, and has been abused by the press worse than Lindsay Lohan.
Jinkosolar (JKS) is another Chinese solar that trades for under 5X earnings with tremendous growth. When these sell off, the "patriots" on Wall Street tend to completely crush them, so make sure to buy on dips and trim on rips.
National Western Life (NWLI) is a company trading for less than half of tangible book value and for 8X trailing earnings. The business is riding high on emerging market demand for life insurance yet is based in the United States. The business has a large insider ownership percentage and the shares are mind-numbingly cheap on asset value and cash flows. Buying these shares on sell-offs will provide investors with a larger margin of safety.
Hastings (HAST) is a thrift store, electronics store, coffee shop, candy store, movie shop, video game dealer, and comic book store rolled into one. The company trades for around 40% of tangible book value and for less than 4X free cash flows, yet every "expert" and his mom hates the business passionately. It is these haters that solid long-term investors should take advantage of and buy shares from.
Microsoft (MSFT) -- Here is another example of Wall Street's "bigotry" of undervalued, worthy candidates for long-term investment. MSFT is about as cheap as it gets at 9X earnings: The stock beats on earnings and reports 33% earnings growth yet gets punished in after hours trading by those tech HFT manipulation/Skynet machines because they aren't selling enough Windows. Doesn't MSFT sell cloud software, Kinect, offer Bing, etc.? I am blown away by the fact that OpenTable (OPEN) trades for 26X revenues while MSFT gets thrashed on 33% growth (around the same as OPEN's non-acquisition rate of growth) and trades for a full 20X cheaper price tag on earnings and cash flows.
TEVA -- "The trend is your friend" is all we hear anymore. PE ratios are meaningless and so are cash flows from operating activities -- at least that's what the investment bankers trying to bring bids into the IPO market want you to believe. TEVA is riding a different trend -- generic prescription drugs. TEVA is dirt cheap at 8X forward earnings and around 10X cash flows. The stock is selling off because it's undervalued. Go figure.
Gilead (GILD) -- Another victim of the few pennies per share quarterly earnings miss, Gilead has lost some of its luster although this cheap stock -- which trades at less than 9X forward earnings estimates -- has risen by a nice amount over the past six months. GILD investors should consider buying long dated in the money calls and selling front month calls against the stock.
AIG -- The lagest holding of Morningstar's Mutual Fund of the Decade cannot catch a bid. AIG is below book, bailed out, and looking cheap at a forward PE ratio of around 11X. With a growing book value and newly cleansed balance sheet, this company is way too hated right now by those "in the know." This should seem a bit ironic, but those who heard rumors of Bear Stearns' collapse before it happened know that Wall Street is filled with cannibals, and that no one knows you like your friends and family members.
Oilsands Quest (BQI) is not a "good" company by any stretch of the imagination. Management has lost countless amounts of money bringing heavy crude onto the market and has had to issue countless rounds of secondary stock offerings to fund "whatever it is they are doing" up there in Canada. That said, BQI holds claim to some of the largest oil reserves in the entire world, and if the company can get it right for a change, these shares could reflect tangible book value or an even higher price, which would mean that shares could double from current prices.
Total (TOT) is dirt cheap and hated on by most investors because it is located in France. Everyone on Wall Street hates France. Of course, these same bull market "believers" (the only ones who still have jobs right now) love the British Royal Family even though our country fought against them for our independence many years ago, and were in many ways aided by the French who weakened the morale of the British in the New World. Total is cheap as it gets on earnings, and holds reserves and income-generating assets all over the world. At 8X earnings, this one is a no-brainer.
Newmont Mining (NEM) is another no-brainer that holds tremendous gold reserves and trades for a measly 12X earnings. Compare that number with any of the gold stocks that the herd is buying at 50X earnings and you have yourself a deep value bargain based on asset values and cash flows.
Freeport (FCX) is a name I have liked and written about since it traded at prices 40% cheaper, but the stock is still a strong buy based on a forward PE ratio of only 9X. Freeport's assets net of debt dwarf the company's tiny market cap, but investors don't like any stock with a PE ratio under 50X right now because being conservative only works when it's not applied toward investments in lower Manhattan.
Aspen Insurance (AHL) -- Japan's earthquake has beaten this reinsurance stock worse than a redheaded stepchild, but the company is not in the business of insuring nuclear reactors in Japan -- AHL is widely diversified and will likely lose less than many investors imagine. My advice? Buy the stock anywhere near $26-27 per share and hold it through 2012. If the world fails to end, investors should make a fortune in the name, trading at around 60% of tangible book value.
Lender Processing Services (LPS) -- At a PE under 9X and a price to free cash flow ratio that borders on absurd, this stock looks to be a steal at current prices. The company is a Magic Formula name and should be bought and held for at least a year. Or you can sell the at the money leap puts for a better margin of safety.
Goldman Sachs (GS) -- Goldie is still the only game in town, and the company will bounce back from the misdeeds of a select few. GS is not your grandmother's investment bank, but in the world of the IB you almost want it bending a few rules if it means added shareholder value over time. In other words, you don't want to bet on the nice kid when gambling on who wins a fight in the sandbox. At 9X earnings and 1X book value, Goldman looks like a reasonable long-term bet. Investors should buy the leap Jan. 2012 $140 calls and sell the at the money June calls to lower risk.
Genco (GNK) -- Speaking of risky, Genco is trading as if it were the publicly-traded arm of Genco Olive Oil after Don Corleone got shot. GNK is a shipping company trading at a 2X PE ratio and some stupidly cheap percent of book value. Speaking of value, this thing makes a lot more sense than many other names in the market based on the numbers.
New Concept Energy (GBR) -- This little gem trades for around 35% of tangible book value and holds large gas reserves. Because it's cheap, everyone hates it -- capitalize on reverse psychology by adding to it when it goes lower.
Disclosure: I am long GS, HSOL, SOL, JASO, NWLI, HAST, GBR, LPS, MSFT, TEVA, GILD, AIG, TOT, FCX, NEM, AHL, GNK, RIMM.