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Get Ready for the Bounce

getting a pardon
by a&nota

Article by Ritika

“Don’t catch a falling knife,” as the old saw commands. (Pardon my mixing a cutlery metaphor.) The idea of buying a former superstar stock at a discount price certainly has its attractions, but you’ve got to make sure you catch the haft not the blade.

Today, we once again stand beneath Mr. Market’s silverware drawer, measuring which knives have fallen the farthest. Then we’ll call on CAPS to ask which of these stocks — if any Foolish investors believe are ready for a rebound. Let’s meet today’s list of contenders, drawn from the latest “52-Week Lows” list at Beginning at the bottom, a third-quarter report of shrinking losses, combined with modestly positive test results on its lorcaserin obesity drug, weren’t enough to salvage Arena shares from hitting a yearlong low last week. CAPS members seem unimpressed, granting the stock a three-star rating, and maybe rightly so. According to the Fool’s resident biotech guru, Brian Orelli, VIVUS’ Qnexa product is a better bet than lorcaserin in any case.

Medical stocks claimed a second victim in the form of skin-cancer sleuth MELA Sciences. No particularly bad news of note here (at least not yet). But there is an FDA decision on the firm’s MELAFind melanoma detector coming up Thursday. Investors may be hedging their bets against a potential negative outcome and with a three-star rating here as well, it would appear most Fools agree.

The most interesting stock on this week’s list has to be NRG Energy a company so nice, they named it twice. As you’re no doubt aware, the company’s been all the talk of energy circles lately, thanks to its participation in a novel three-way going-private transaction. Taking a break from its running verbal battle with Warren Buffett, private-equity standard-bearerBlackstone is working hard to seal the deal on a purchase of Dynegy. If it succeeds, NRG will purchase four of Dynegy’s natural gas-fired power plants as part of the transaction.

Good news? Bad news? Let’s find out, as we flip the switch on.

The bull cash for NRG Energy:- Taking a “Q” from S&P, CAPS member APPLERD tells us the equity rater has NRG marked for a “buy” rating. “Earnings have been projected down but good aquisitions are up. P/E and P/B well below industry averages.” CAPS companion sssandhu78 agrees the stock is “undervalued long term.” While SupBooks believes that rather than the current sub-$ 20 valuation, a “fair price” for the stock would be “perhaps around 40.” That would make the stock a pretty obvious buy — but why does ssandhu78 think NRG is worth $ 40?

At a P/E of only 9, the stock certainly looks cheap. NRG sells for barely half the value of its annual revenue, and less than two-thirds its book value. Larger utilities like Exelon and Duke Energy sell for multiples far larger. A share of Exelon will cost you closer to 1.5 times annual sales and 1.9 times book value, while Duke costs 1.7 times sales, and 1.1 times book.

On the other hand, both these companies are significantly more profitable than NRG. NRG’s 6.2% net profit margin pales in comparison to the 9.1% Duke earns, and the 14.3% net profit margin at Exelon. On the other hand, NRG is growing faster than either of these rivals. (Indeed, if you trust the analysts’ forecasts, Exelon could actually see its profits decline over the next five years.

Time to chime in:- It seems that for every investor who wants to own NRG, there’s another who wants to avoid the stock. And if you like to get paid for investing in a utility, you’ll want to consider that NRG doesn’t pay its owners a dividend. Meanwhile, Duke and Exelon both regularly cut 5%-plus annual dividend checks to their shareholders.

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