The Profits From Venture Capital-Type Investing
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Rising more than 100% for 2012, Sprint-Nextel (NYSE: S) clearly demonstrates to all the profits that can be made from venture capital-type investing in blue chip stocks that have fallen in price. A venture capitalist profits by investing in a wide variety of companies, and hoping that one or two become the next Google or Apple (NASDAQ: AAPL). As Sprint-Nextel and others such as Ford Motors and Xerox have shown, triple digit profits can easily be booked.
Now trading around $9.50, Ford Motor was well under $2 a share in March 2009. Xerox, now about $7.40 a share, was around $4 in early 2009, too. Each has fallen: in late 2010, Xerox was about $12 a share. At that same time period, shares of Ford Motor were going for over $18.
There are many other opportunities for such venture capital profits remaining in the stock market: there always will be as some sector will always be in disfavor with investors. Although Sprint-Nextel is still not profitable, it has rebounded due to its partnership with Apple. Selling the iPhone has been very rewarding for the shareholders of Sprint-Nextel. That should only improve with the iPhone 5.
Unlike Sprint-Nextel, Alcatel-Lucent (NYSE: ALU) actually makes money. Like Sprint-Nextel, however, Alcatel-Lucent has suffered from an ill-fated merger. Now around $1.17 a share, Alcatel-Lucent has a profit margin of 1.36%. Its valuation is very tempting: the price-to-book ratio is 0.64 and the price-to-sales ratio is only 0.15. There is loads of cash on the books of Alcatel-Lucent: the price-to-cash per share ratio if 0.44. For Apple, the price-to-cash per share ratio is 28.44.
Alcatel-Lucent does not appear to be a value trap as its earnings-per-share growth this year is increasing by 271.88%. Next year, earnings-per-share growth is projected to be 1300%. Obviously, rises like that cannot last, but the trend is certainly heading in the right direction. In terms of not moving in the right direction, in 2007, Alcatel-Lucent was trading at over $14 a share. In 2006, it was over $15 a share.
Other sectors that were brutalized by The Great Recession or mismanagement offer similar opportunities. The shipping industry and home builders have many companies that are trading in the low single digits and profitable with alluring features. Global Ship Lease, as an example, is selling for $3.20 a share with a profit margin of 16.28%. On a quarterly basis, sales growth is higher by 163.78%. The price-to-earnings ratio is just 6.96 for Global Ship Lease. In early 2011, it was over $7.50 a share.
Alcoa (NYSE: AA) is a member of the Dow Jones Industrial Average going for around $8.60 a share. It was well over $45 a share in 2007. In early 2011, it was around $18 a share. Slumping economic growth in China has the share price of Alcoa falling along with the global demand for industrial metals. But, eventually the need in China and other nations for aluminum will pick up again; and so will the share price of Alcoa. Alcoa is profitable; and its earnings-per-share growth is up this year by 112.94%, and expected to rise in the triple digits again for the next year. In addition, Alcoa is often mentioned as a takeover candidate.
Arch Coal (NYSE: ACI) is another fallen blue chip suffering from the slump in China, the world's largest coal importer. Declining demand in China has depressed prices for coal stocks around the globe. The 52-week high for Arch Coal is $20.47. It is now around $6.60 a share. Arch Coal has sales growth rising by 7.92% for the quarter; with a price-to-sales ratio of just 0.31.
Within the past decade, Apple was selling at $7 a share. McDonald's was around $11, too, within that same time frame. Fallen blue chips do recover. The rebound of Sprint-Nextel offers lessons for investors in selecting which ones to acquire.
Like Ford, Sprint-Nextel is in an industry with only a few competitors and very high barriers-to-entry. Sprint-Nextel was not clinging to an outmoded business technology, like Eastman Kodak. Instead, Sprint-Nextel aligned itself with an industry leader in Apple; and the rest is a very pleasant history of price increases for its shareholders. For others investing like a venture capitalist, there will be similar rewards from surging share prices in the future.
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
