It goes without saying that a low absolute stock price has nothing to do with value obtained. A $100 share stock can easily be a better bargain than a $2 share stock; a $2 stock can go to zero, resulting in an absolute loss. So price alone in no way dictates or determines value.
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An Interesting Thing About Price
However, when one can locate a seemingly quality business with a tarnished stock price, an additional opportunity exists that aids the share price. Many large institutional investment funds, the players who really move markets, often have specific mandates prohibiting them from engaging in certain investment activity. Things like shorting stocks, minimum market caps, and other restrictions are in place to protect the millions of ordinary folks invested. Another popular restriction is the prohibition of buying stocks trading at under $10 a share.
Foolish or not, many funds must avoid stocks trading under $10, despite any attractive upside. Obviously this can create opportunity for those investors who can buy good businesses trading under $10 in hopes that once they do hit this "milestone" number, they will attract all the institutional money that can invest.
A Few Ideas
Cemex (NYSE:CX) is one of the largest cement and aggregate companies in the world. The company has been around for 100 years and has operations all over the world. Suffice to say, the combination of a global recession along with a credit crisis hurt Cemex which has over $16 billion in debt. Today shares are just below $10 against book value of over $17 a share. (For more, check out Digging Into Book Value.)
Mueller Water Products (NYSE:MWA) is a provider of water infrastructure products. Its products, such as fire hydrants, valves, pipe fittings, and water meters, are specified for use in 99 out 100 top U.S. major cities. Nearly 75% of 2009's $1.4 billion in sales comes from products with #1 or #2 market positions. Shares trade for $4.70, or a market cap of $740 million. The company's debt has been amended and a continued economic recovery should resume the company to profitability.
Eagle Bulk Shipping (Nasdaq:EGLE) is a dry-bulk shipping company that has just experienced a tsunami-like environment. Shipping rates have plummeted and excess ship supply has failed to propel the industry during the 2009 upturn. Eagle, along with names like DryShips (Nasdaq:DRYS) and Excel Maritime (NYSE: EXM) had placed major orders back in 2007 that had to be adjusted to deal with the new environment. As a result, Eagle, which has used its cash flows to pay a healthy distribution, was forced to cut it. Yet the company policy of chartering out its ships on multi-year contracts gives along with a focus on a fleet that carries a bigger variety of commodities is a plus. The $5.60 stock price is half of book value and well below the $25 price tag a couple of years back. (For more, see Finding Profit In Troubled Stocks.)
No Sure Thing
For good reasons, these companies share prices have fallen on hard times. Yet they have managed to get out of the worst economic period in over 70 years and have very interesting scenarios that can create value if they play out.
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