7 Beaten Down Stocks Presenting Value Or Trap

 |  Includes: BBRY, CAT, HPQ, MMM, NFLX, NOK, S
by: Brian Nichols

The last few months have provided substantial loss for most of the stocks traded within the major indices. Several stocks have lost value because of market conditions and strong selling within the markets. Others have lost for fundamental reasons or because of news that pertains to the individual company. Below are 7 stocks that have fallen for one of these two reasons. I believe that 5 of these stocks are buys while the other 2 still lack direction, therefore I anticipate more problems ahead. Either way, each of these stocks has been beaten down with the markets. It's time for investors to decipher if the loss presents value or if it’s a trap.

Hewlett Packard (NYSE:HPQ) has been beaten down, losing more than 30% of its value over the last 3 months. The company appears to lack direction, which many believe is what caused the stock to lose so much in value. The company’s growth has began to slow, as it has been unsuccessful in the tablet or smartphone industry. Yet the company now has new leadership in Meg Whitman, the former CEO of EBAY, who may not have the experience in selling hardware but she has great leadership qualities. I believe leadership is what this company needs, someone that will provide a clear direction, but until that direction is clear I don’t feel comfortable in purchasing the stock. Fundamentally the stock looks good with a $47 billion market cap and a P/E of 5.55. It’s also recorded $128.40 billion in revenue, has $12.95 billion in cash, and has a solid debt-to-assets ratio. But until I see a clear direction, or at least a plan, I can’t recommend this stock as a present or future purchase.

Research in Motion (RIMM) is the maker of the BlackBerry products and has lost nearly 60% of its stock value over the last 6 months, including 23% during the last month. The loss is a result of a fading product, the BlackBerry, which has steadily decreased in sales over the last year. The company is a distant third at best, behind Apple (NASDAQ:AAPL) and the Android system, and it has given no indication that it plans to innovate or abandon its BlackBerry products. The company’s revenue and earnings have already started to drop, and its forward P/E is only 4.65, which means earnings are expected to drop further. The only bright spot that I see for this company, heading into the next few years, is its balance sheet. The company has no debt and $7.3 billion in assets, including $1.15 billion in cash. Therefore, the company is capable of concentrating on the future with a better financial situation than other technology companies of the past, that were in similar situations, such as Apple in the late 1990s, but it must make changes soon if it wants to keep a solid balance sheet. I believe sales will only get worse in the immediate future if the company continues to focus on improving the BlackBerry name. I believe it needs something fresh and different. And until changes are made, or at least a plan is presented, I cannot suggest this stock for either a short- or long-term purchase at its current price because I fear the loss is just getting started.

Netflix (NASDAQ:NFLX) has lost 51% of its value over the last 3 months, including 42% during the last month. The stock has been on a downtrend ever since the company announced it was separating the mail-order DVD segment and the streaming segment into two separate charges for its customers. I believe the business decision was a good idea, since the company’s profit margin was only 8% for the last 12 months. However, I was expecting this change to have a substantial affect on the company’s subscribers, such as 3-4 million subscribers taking their business elsewhere. So I was surprised when the company announced a reduction of only 1 million subscribers, which is a small percentage considering the company has well over 20 million. Therefore I believe earnings for the upcoming quarter could be well above expectations. It will depend on the number of users that subscribe to both services versus one service. If a high number of subscribers, 85%, are only using one service then earnings will be a huge disappointment, and the stock could drop well below $100. But if the margins are closer to 70/30 then earnings could be exceptional for the investor who takes advantage of the current price. The company has a P/E of 32.68 and a forward P/E of 19.75, which means the market expects earnings to continue rising. I believe it is well positioned for long-term growth, even with increased competition, because Netflix is still a great service that millions of people enjoy. Therefore, I believe the loss presents value, but I am anxious to see the earnings report, and until I see earnings I will wait, but I would not be surprised if a large percentage of subscribers are ordering both services, which would return exceptional gains for investors taking advantage of the stock’s low price.

Nokia Corporation (NYSE:NOK) has fallen by more than 35% over the last 6 months yet its price has somewhat stabilized during the last month, losing only 4%. The stock trades with a $21.50 billion market cap with price to earnings of 12.65. Based on the company’s recent performance it should be no surprise that its forward P/E is higher, at 15.72, which means the company is expected to post a drop in earnings. The company has posted $57.62 billion during the last 12 months with only 2.9% in profit. It has experienced significant drops in revenue because of its failure to capitalize on the demand for smartphones and tablet devices. Yet the company is working with Microsoft (NASDAQ:MSFT) on its new Windows Smartphone, which gives investors hope for the future. The level of success for the new Windows phone is unknown, but if we judge its success from past Windows phones then we would assume that it would be a disappointment, which could be playing a part in Nokia’s loss over the last year. Yet the technology industry is very competitive and I believe that Nokia, and Microsoft, have the patents, technology, and innovation within both companies to create a successful product. I believe the product will achieve higher levels of success in comparison to previous Window phones and could result in gains for Nokia. It’s a speculative position with similar levels of risk as reward, yet I believe that with a strong balance sheet, which includes $13.13 billion in cash and years of industry leading products, that this company is fully capable of creating a competitive device against the Apple iPhones and HTC Android devices. I believe that NOK is a long-term buy but only in a small position, and because of its worldwide relevance and its growing success in the mapping industry I believe the stock is more likely to rise versus fall, especially if the new Windows phone were to achieve a decent level of success.

Sprint Nextel (NYSE:S) has lost 40% of its value during the last 3 months. The stock trades with a market cap of $9.46 billion with revenue of $33.08 billion over the last 12 months. The company has created a trend of net loss with a profit margin of negative 9.45%. Sprint has $4.27 billion in cash with $18.5 billion in debt with assets of $49 billion. Overall, I would say the company’s financial situation is a mess, with a terrible balance sheet that posts a higher debt-to-asset ratio year over year. The company’s inability to post a profit has forced it to make changes and adapt to its financial situation, which includes selling assets while maintaining total debt. This has resulted in a higher debt-to-assets ratio that has consistently trended higher over the last 5 years. This strategy is common for companies that experience financial distress but it does not result in long-term success, but rather a short-term solution. Despite my opinions that Sprint’s fundamental history presents nothing but red flags I believe this stock is a value at this price. The stock is trading at $3.08, which is significantly lower than its $4.45 book value per share, based on its most recent quarter. I believe the company’s income statement will improve throughout 2012 because of the iPhone 5. To paraphrase, the company’s CEO recently said that Sprint has been hurt by not selling the iPhone. Sprint is a large company that tries to compete with Verizon (NYSE:VZ) and AT&T (NYSE:T) but has been at a significant disadvantage by not providing its customers with the most popular handset phone in the world. Therefore I am bullish on this stock and I have been since the company announced that it would be carrying the new iPhone 5. I believe this will help the company retain customers much longer along with attracting new customers to its service. I believe that Sprint is presenting value at its current price and I believe that any price near its current position will return large gains to shareholders, yet I am undecided on its long-term performance. I still believe the company needs to downsize and focus on its most profitable stores because it continues to operate with too many stores that post a loss. I do not believe the company will make this change because it wants to compete with Verizon and AT&T, therefore I do not believe the sales from the iPhone will result in profitability. I believe the company will post substantial gains in revenue from the sales of the iPhone but I also expect that Sprint will have much higher costs. Sprint will most likely spend a great deal of money on advertising its new iPhone 5, it will want every potential customer to know that it carries the number one brand in communications, and I believe the costs from increased advertising and higher operating costs will keep the company from posting a profit. But for Sprint to achieve success it does not necessarily need to post a profit, it just needs to close the gap of net loss, and with higher revenue and better margins I believe that investors will be satisfied and will invest in the company, which will cause the stock to rise.

Caterpillar (NYSE:CAT) is one of the most vital components to the Dow Jones Industrial Average (NYSEARCA:DIA), with a heavy weight in its index. The stock has lost 35% of its value over the last 3 months with 12% during the last month. The stock is trading with a P/E of 8.27 but has a forward P/E of 5.43, which means earnings are expected to significantly increase. For the last 12 months the company has recorded $51.12 billion in revenue with a profit margin of 7.83%. It has $9.46 billion in cash including $73.6 billion in assets and $34.4 billion in debt. The only issue that I see with this company’s balance sheets, or income statement, is that its debt-to-asset ratio is much higher than I prefer to see for a growth stock. However, the company is growing at an incredible rate and has managed to maintain a high level of growth despite weaknesses in overall construction and manufacturing. Because of these economic weaknesses I believe the stock has fallen and that its loss is not related to its financial performance or the stock would be trading near all-time highs. I believe as the economy improves CAT will become one of the fastest growing stocks within the market with expectations to continue posting profits by large margins. Therefore at $76 I believe this stock is a strong buy presenting a large amount of value as it is trading $40 from its 52-week high despite higher earnings.

3M Company (NYSE:MMM) has lost more than $20 from its stock over the last 3 months and now trades with a price near $75. For the last 12 months the stock has posted $28.57 billion in revenue with a profit margin of 15%. It trades with a P/E of 12.72 and a forward P/E of 11.03 which means earnings are expected to rise. The company’s balance sheet is solid with $4.5 billion in cash and $32.2 billion in assets with only $5.6 billion in debt for its most recent quarter. Before the recent sell-off within the market the stock had been trending higher since 2009, because of solid earnings and a strong business. The company is constantly increasing guidance and exceeding expectations. I believe at its current price the stock presents value with the company showing no signs of growth slowing down. The only complaint that I hear regarding this company is that it operates in too many segments and should consider breaking the company into several parts or selling segments. I believe that MMM should be a model of how to run a business with a strong presence in several industries from the food industry to industrials. The company has a strong line of revenue and is constantly innovating and creating new revenue lines while building on the segments already in place. I believe that 3M is presenting value and will significantly outperform the market over the next five years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Statistics and earnings were obtained from either company reports or Google Finance. As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment decision or follow a particular strategy.