In normal times, an unemployment figure hovering within
spitting distance of 10% would be bad news indeed. These are
far from normal times, of course, and the stock market has
been defying the laws of economic gravity for a while now.
It's shot up sharply, even though nearly a tenth of the
available workforce has no work. Indeed, the S&P 500 has
tacked on more than 50% since its March lows.
Cash for clunkers Â
The rally has been especially kind to seemingly
vulnerable stocks such as
Goldman Sachs (NYSE: GS) and
Morgan Stanley (NYSE: MS). Both have
pole-vaulted to triple-digit gains on a year-to-date basis,
despite dodgy financial health and exposure to the slings and
arrows of a still outrageous financial sector. Toxic assets
haven't evaporated, after all, and the feds have been
scrutinizingBank of America's acquisition of Merrill
Lynch for signs of criminality.
Meanwhile, the charts of
Amazon (Nasdaq: AMZN) and
Intel (Nasdaq: INTC) demonstrate similarly
suspect trajectories. Make no mistake: These companies are
far stronger than the likes of Goldman and Morgan Stanley, in
my view. Nonetheless, they now sport multiples that look fat
and
unhappy: Both trade at more than 40 times current
earnings.
If the recovery isn't as robust as the market seems to
think it will be, stocks with aggressive valuation profiles
such as these may take a hard hit. That's also true of
high-flying
Visa (NYSE: V), which trades with a P/E near
40 despite the fact that its fortunes are basically tethered
to the economic cycle via consumer spending -- and the level
of consumer default.
Meanwhile, at the other end of the valuation spectrum
....
ConocoPhillips (NYSE: COP) and
Chevron (NYSE: CVX) may not appear as richly
valued -- in fact, the former is sporting a negative P/E.
Still, following substantial price pops over the last
quarter, are these companies values or value traps? Both are
deep cyclicals whose fortunes will rise or fall with demand
for a highly volatile commodity.
Dialing for dollars Â
During these strange days, you may be surprised to
learn that I have my eye on
Sprint Nextel , which is up about 75% on a
year-to-date basis.
Rocked hard amid the downturn, Sprint last paid a dividend
in 2007, and it has posted negative net income during each of
its past two fiscal years. At a glance, the company looks
similar to the stocks I "trash-talked" above. Yet one Fool's
trash is another's treasure -- and Sprint looks like a
diamond in the rough to yours truly.
At some level, after all, even flailing companies can make
attractive investment prospects. Sprint isn't exactly
flailing: It raked in more than $35 billion in revenue during
fiscal 2008, netting out a gross profit of nearly $19
billion, and the company has been free-cash-flow (FCF)
positive during eight of the past nine years. The sole miss
occurred way back in 2001, and the past 12 months have seen a
sharp FCF increase compared with 2008.
On the risk side of the ledger, I'm troubled by the
company's recent debt offering. Yet even after factoring this
fresh development into the analysis, Sprint appears to be
trading at a steep discount to fair value. Indeed, using a
normalized free cash flow figure and conservative estimates
of earnings growth that account for Sprint's third-place
status in a race that includesÂ
Verizon  andÂ
AT&T , my back-of-the-envelope valuation
for the company comes in at roughly $7.50 a share. As I type,
Sprint trades near $3.20.
About that envelope Â
I didn't actually use one. I used the discounted cash
flow (DCF) calculator that comes gratis with the
Fool'sÂ
Inside Value service. With pointers
to the data you need, this no-muss, no-fuss tool comes in
handy indeed when winnowing a field of contenders down to
just those that appear worthy of further research. Continued... |