Separating the Bargains From the Busts

 | Nov 19, 2012 | 2:00 PM EST
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I've heard many people judge the market by the 700-point drop in the Dow since the U.S. elections ended. Somehow it has become easy to blame the drop on that event. Perhaps a 100%-plus advance in equities in the past four years against the backdrop of slow economic growth and unprecedented monetary stimulus may also be forces to blame. 

In any event, since I am very poor at timing markets, I simply use times like this to watch oversold names and moves by big-name investors. While Mr. Market is taking a little vacation, what better time to take a step back and pay a little less attention to headlines and more attention to prices? 

Not surprisingly, the list of stocks making 52-week lows has grown over the past couple of weeks, although it still remains tiny relative to the overall market. Looking for ideas on this list can be a risky exercise, akin to catching falling knives; many on the list will stay on the list. On the other hand, it's also common for temporarily out-of-favor stocks to find themselves exiled to lowly group, only to emerge from it with the kind of strong advance that value-seeking investors cherish. 

Dell (DELL) is a name that I have struggled with for the past few months. I first suggested Dell a worthy value candidate when shares were changing hands for around $10. Today Dell finds itself joining the 52-week low list at $8.80. Dell is reinventing itself and doing so in the most competitive and rapidly moving industry. Perhaps Dell will find its way to $7 a share before $15, or perhaps not. Yet until I see signs that the balance sheet is crumbling and the company's free cash flow is negative, perhaps Dell is now a free call option on a turnaround -- an option yielding 3.6% and nearly $3 in cash per share to be precise. 

I don't harbor the same view for Hewlett-Packard (HPQ), another tech titan that has become a member of the 52-week-low club. With no tangible equity to speak of and net debt of about $20 billion against a market cap of $25 billion, Hewlett-Packard has a tough road ahead. Considering today's economic backdrop, this stock gets filed in my "too tough to figure out" box.

The retail shopping bonanza begins this Friday; the next three to four weeks are when retailers reportedly move out of the loss column and into the profit column. Several retailers have found themselves at or near 52-week lows, including Bed Bath & Beyond (BBBY), Big Lots (BIG) and J.C. Penney (JCP). Forget the analyst reports or estimates; if you are at the malls this week, take a peek inside these stores and do your investigative work. One favorite that is close to a 52-week low is Stein Mart (SMRT), a high-quality discount retailer that has a long string of profitable quarters and a pristine balance sheet. 

This could be a perfect time for investors to think squarely about valuation while paying attention to the economy and its trends, not the other way around. The economy was in shambles in 2009. But consider where valuations were then and what that meant for investors. Today's valuations are not close to those of 2009, but when valuations are attractive, the economy doesn't have to be perfect for them to do well. 

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