In the wake of Green Mountain’s takeout at a 75% premium, last night on CNBC’s Fast Money we were asked to throw out a few names of stocks where the price action has been so bad, the valuations so depressed and the sentiment so poor that the underlying companies could emerge as a takeout candidate. Basically a so bad it’s good situation. The growing bifurcation in the market presents no shortage of opportunities on this list.
First, I want to hit on a weird thing about the current “bull market”. Large cap stocks (the S&P 500 and the Nasdaq Composite) are just a few percent from its all time highs, while the small caps, measured by the Russell 2000 are down more than 10% from their 52 week and all time highs. While the breadth is poor in large caps, dominated by the outside performance of about 10 ten stocks, the relative weakness in the Russell suggests that most small caps are already in correction mode, with hundreds that are down at least 20% from recent highs. You could also make a list of erstwhile large cap stocks making a bid to join the Russell 2000.
Which brings me to the choice I made for the segment last night. 3D printing company 3D Systems (DDD). Two years ago DDD had a market capitalization of over $10 billion. It is now worth about $1 billion. The five year chart (below) shows the stock’s 1000% gains from late 2011 to its all time highs in early 2014, and the stock’s subsequent 90% decline, retracing the entire move:
I would say that DDD fits all of the criteria laid out for a so bad it’s good situation. The stock is down 72% in 2015, at 5 year lows, sentiment is atrocious with 33% short interest, Wall Street analysts have abandoned the stock with only 3 Buy ratings, 16 Holds, 3 Sells and the stock trades at only 1.5x sales. Assuming that sales are not falling off of a cliff next year, after a flat 2015 year over year, consensus is calling for a 4% increase, the company should be just fine as they have no debt, and $150 million in cash.
3D printing, while over-hyped a couple years ago, is not going away. If DDD’s products and patents can help a large industrial or tech company get into the space quickly, with potential for scale and synergies, then a stock like DDD could look cheap and attractive due to its scarcity value.
This is the sort of stock I would wait to look at right before the end of the year, as holders may look to book losses. Of course with any beaten up stock there is one large caveat, the shorts have been right the whole way down on this space. And in a market we appear to be in, where a handful of stocks are doing the heavy lifting, acquirers have been wise to be patient on beaten up stocks. Cheap has been getting cheaper.
But for those who think the stock market breaks out of its 2015 malaise to the upside, it will need broader participation, and beaten up stocks like DDD with high short interest and poor sentiment could see 50% rallies in a quick. Let’s say I am kicking the tires.