3 Firms with Unjustified Sell-offs
Phillip is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Buying shares of a company after a major sell-off can often net you a tidy profit -- assuming, of course, that the sell-off was an overreaction. Knowing if the company actually lost investors' interest for no good reason is difficult, however. In taking a close look at firms, you can often see where things went wrong and how the share prices might improve. Let's take a look to see whether Axiall (NYSE: AXLL), Lululemon Athletica (NASDAQ: LULU) and Foot Locker (NYSE: FL) warrant buys. These three firms have experienced either high or moderate declines in share prices, but those sell-offs don't appear justified.
Axiall experienced a first-quarter blip
With the recent drop of about 25% at Axiall in the past couple of months, the firm looks to be a buy. The company was hit hard after completely missing analyst estimates for the first quarter by 38%. The firm was trading at $56.51 per share prior to the announcement, but it now trades at around $42.50. The company has recently merged and is just about to collect the bounty from cooperation with PPG Industries, however. The merger happened on January 28, well into the first quarter, and the multi-billion dollar merger resulted in increased costs. The benefits of that agreement will likely lead to improved business efficiency and increased profits in the years ahead.
Lululemon has its pants back on
The announced resignation by Lululemon's CEO resulted in a sell-off of over 20% between June 9 and 11. The decline is also likely affected by a yoga pants recall that increased costs in the quarter. The drop is unjustified considering that the company increased its revenue by more than 21% compared to the corresponding previous year's quarter. Furthermore, the company's earnings per share beat the consensus analyst estimate. Lululemon is also expanding internationally and will set up shop in up in 15 new markets within the next several years.
Foot Locker is desired by feet everywhere
The shoe business is one of the most attractive for investors who want to add a recession-proof element to their portfolios. Furthermore, Foot Locker sells many athletic-related shoes, which are often purchased by young people. This physically-growing demographic will need new shoes as they outgrow what they formerly wore, and that means more shoe sales. The industry is also dominated by name brands which are continually coming out with newer versions that young people will want to tie to their feet.
The forward price-to-earnings ratio at Foot Locker is 12.1 times, which is a $2.86 consensus earnings per share for this year. The company's earnings before interest, taxes, depreciation and amortization (EBITDA) is estimated at $815 million. The industry average EV/EBITDA of 6 times is relatively low for Foot Locker because the company's profit margin is higher than average. If the firm grows EBITDA by 5% over the next year, the EV/EBITDA multiple likely falls to 4.8 times, representing a potential upside of 25%.
Long-term investing is the way to go
Long-term investors have a surefire advantage when owning stocks because they don't often jump on bandwagons and sell their shares on news that will likely only have an effect in the short term. Not letting emotions get in the way can ensure that these investors make calculated decisions based on the company's overall operating capabilities.
Axiall, Lululemon and Foot Locker have undergone sell-offs related to news that only affect the firms in the short term. This creates an enticing buying opportunity for investors who can see that the firms have what it takes to prosper long into the future. I always add companies that have experienced major sell-offs to my watch list, and then I investigate whether shareholders have overreacted in their decisions to sell.
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Phillip Woolgar has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!