Earlier this week, I tweeted that "it's amazing how performance changes perception" in regard to Sprint (S). In fact, it's simply amazing how the price or trend of a stock can change the outlook of investors. Back in January, a few others and I were getting crushed on a daily basis for saying that Sprint was undervalued, and that it had more than 200% upside and was worth more than at any period over the previous two years. Yet today the only question surrounding Sprint is how much higher can it trade, as no one seems to remember their initial opinions regarding the stock.
Ever since Sprint's most recent earnings report, which led to Jim Cramer's change of opinion, the stock has been on a roll. It has now returned 120% in 2012 and shows all the signs of a stock that is on the rise. However, the big questions investors should be asking are: "Why is it all of a sudden a buy?" and "What has significantly changed in the last eight months?"
The changes that have occurred for Sprint are nothing that anyone with an open eye couldn't have seen coming. My reason for buying Sprint below $2.40 has always been that it's a much better company today with the iPhone than at any point during the previous year, when it was trading significantly higher without the iPhone.
Sprint's problem the last five years has been that it couldn't compete without the iPhone and that its expenses were too high. The company now has the weapon to compete with its larger competition, and because of its own decision to offer unlimited data and effectively switch its customers over to its network from Nextel, it is seeing revenue and subscriber gains. Therefore it has been a good comeback story, a story that is just getting started as Sprint is presenting more upside than at any period over the last five years.
That said, which company is the next Sprint? Is there a company in the market that has been beaten down, but is worth more today than it was last year when it was trading higher? Is there a company in the market that has a recent development similar to Sprint receiving the iPhone, yet the market has not priced in its potential? In this article I'll be looking at a few companies that have been beaten down, and determine if one could be the next "Holy Grail of Speculation."
Nokia is perhaps the most obvious choice. In fact, some suggest its 46% gain over the last month could be linked to Sprint. However, in its last quarter the company saw revenue decline 18%, and the company is no longer profitable with a $4.3 billion loss in the last 12 months.
Sprint used to be in the same situation, with declining revenue, declining cash, and an uncompetitive product. The difference is that Sprint now sells the product that was causing its problems while Nokia still has to compete with the same problem (iPhone). Therefore, the question is whether or not Nokia has any product in its future that could turn its frown upside down, or return some of its 90% five-year loss.
My answer to that question is "not a chance." Sure, the company has cut costs, the new Windows phone could be promising, and insiders are buying shares, but it's still competing with Samsung and Apple (AAPL) -- and in this market Apple is king. Therefore, despite the fact that Microsoft's (MSFT) products appear attractive and Nokia does trade with a price/sales ratio of just 0.23, I still don't think it has a chance of trading like Sprint as there are still way too many questions -- and Nokia does not have the competitive edge over its competitors (such as Sprint's unlimited data plan).
Anyone who has ever followed my writing knows how much I love Alcatel-Lucent as a long-term investment. In fact, my unconditional love for the company blinded me from reality and resulted in me losing more than $4,000 on my initial investment. That said, is it possible that its $1.19 price, its price/sales ratio of 0.15, and its several key developments indicate value?
My answer is "not right now, but maybe next year." The company has entered into some very aggressive expansion projects and is no doubt the cheapest in terms of valuation to fundamentals in its industry, yet it's still based in Europe, and until Europe becomes more stable investors will not allow this stock to appreciate. Therefore, despite the fact that Alcatel-Lucent's key developments are encouraging, I doubt its stock rises as its recent developments are not yet providing the growth that investors seek (such as with Sprint). But it could pay off next year if European leaders decide to actually work at fixing the problems in Europe. The good news is that I have a miserable track record when it comes to Alcatel-Lucent, so if you're an investor the fact that I am bearish on its short-term trend could be great for the stock -- it could mean that it triples, so keep an eye on it.
There is perhaps no other stock in the market that is more controversial than Netflix. The company is like a bad movie, therefore I am going to jump straight to the ending -- Netflix doesn't have the catalyst (such as Sprint's iPhone), the growth, or competitive edge (Sprint's unlimited data) to even qualify in this category. Yet with a one-year loss of 73%, it must be discussed.
Before its dismal earnings report, some believed the company was making a comeback, as Hastings mentioned that streaming reached one billion hours in the month of June. However, it turns out that this accomplishment doesn't mean that more people are running to subscribe, but rather current subscribers are sitting down longer to watch more TV. As a result, I can't find one logical reason to buy this stock. It's obviously relying on DVD operations to keep the company profitable, and with increased competition from Redbox and even Blockbuster rental machines, which can be found on every corner, I don't see how it can return consistent growth. I could be wrong, but as of now I can't see the upside, because when a company blames weak guidance on the Olympics, it is a good indication of some serious problems.
Level 3 Communications (LVLT)
In order to follow the lead of Sprint, a company would need a significant loss in valuation despite having the developments for more upside, a major catalyst for growth, and improved fundamentals. In my opinion, Level 3 Communications fits into this category.
In 2011, the company traded in an uptrend at a price around $35 (post-split) for much of the year in anticipation of the Global Crossing acquisition, which was believed to give the company an edge over its competition with more miles of fiber than any other company that stretched into nearly all (or several) developed regions of the world. Therefore, in anticipation of the acquisition the stock traded with a valuation of more than $7.5 billion, but now after the acquisition it trades with a market cap of under $5 billion.
Overall, I think the acquisition has been a success. Investors must realize that acquisitions of this size take time to reach full potential, yet already significant progress is being made. Over the last 12 months revenue has increased to $5.68 billion, compared to $4.3 billion to end 2011. And its net loss during the last 12 months is $643 million compared to a loss of $756 million in 2011, which reflects a drastic improvement in margins. Sure, the company is still losing money, and has a dreadful balance sheet with a massive accumulated deficit of $12.6 billion, but it has made progress and has positive cash flow from operating activities. Therefore, I think Level 3 Communications could be the next Sprint, as a company that has lost significant value over the last year, despite being significantly better today.
Investors must remember that the acquisition closed at the end of last year, therefore it hasn't even been a full year. The company is already seeing major improvements to revenue and margins, which I think represent a fairly good acquisition considering that neither company was profitable and both had massive debt loads. It tells me that the plan that created so much initial excitement is living up to expectations, and once fully integrated, it will give Level 3 Communications a major advantage over its competition. Therefore, is Level 3 Communications the most similar to Sprint on this list? I think so. But is it the best fit with the most upside potential in the market? Perhaps not. Therefore, I'll look deeper in my next article when I present four more companies to consider.
Disclaimer: The information presented in this article is for entertainment and informational purposes only and should not be used to determine any investment decisions