Thursday, October 15, 2009

Blue Chip Stocks at Blue Light Special Prices?

It’s no secret that stocks have bounced back with a vengeance since the March 9th market lows. The major indexes are up +50% since the bottom, with a lot of individual stocks posting double- and triple-digit gains during the same period.

But the economic downturn of the last 18 months has made it difficult for Wall Street to get a clear picture of which stocks at current price levels are fairly valued. Most stocks have seen quite a comeback, but are they really great finds in the bargain bin or leaky investments that could sink your portfolio?

Take Citigroup (C). This stock is a perfect example of a company that has surged triple-digits since March 9 (+340%), and shares are still trading under $5. While the stock’s short-term performance seems solid, Citi used to be a $57 stock. Last I checked, $5 is quite a bit more than a stone’s throw away from that price level.

Citigroup - Bargain or Bad Deal?

Without question, it’s a bad deal. Even though Citi managed to beat Wall Street expectations in the second quarter, a closer look at where that money came from indicates the company isn't faring very well at all.

Citi reported net income of $4.3 billion, but these results included a one-time $11 billion gain associated with the sale of a 51% stake in Smith Barney. Second quarter numbers also showed that credit costs increased to $12.4 billion, including an addition of $3.9 billion to loan loss reserves, bringing the total allowance for loan losses to 5.6% of total loans.

So essentially, even an influx of $11 billion from this one-time sale couldn't offset the damage of all the bad loans on Citigroup's books last quarter.

Anyone who looks at the facts will quickly realize that Citigroup, despite its low stock price, is still a dog with fleas right now. That’s why I rate Citigroup a D and why you should avoid the stock.

Another example of a big-name blue chip at a seemingly bargain price is General ElectricGE). The stock is up +120% over the last seven months, and shares are currently trading at around $16 a pop.

GE - Bargain or Bad Deal?


Like Citigroup, once upon a time, this huge conglomerate was easily worth the $60 a share investors shelled out for it. But this just isn’t the case anymore. In July, the company reported that its second-quarter profit was sliced nearly in half, as the recession drove down earnings at its finance unit and sapped demand for its industrial goods. Although earnings beat forecasts by a penny, GE's revenue fell $3 billion short of expectations.

Is GE a bargain? In a word, no. I currently rate GE an F. Its engine needs a lot of work before investors take it out on the road again.

Alcoa - Bargain or Bad Deal?


The third blue chip bargain stock that isn't really a bargain is Alcoa (AA), which just reported third-quarter earnings.

AA has bounced back over 165% since March 9 market low, but even after such a solid run, the stock is only worth about $14 a share.

The good news is company posted a surprise profit in the third quarter, beating estimates by 144% and reversing three straight quarters of losses. On the surface, these results sound good. But a closer look at the numbers reveals that AA’s profit is down 71%, and its revenue tumbled 34% compared with the same period last year.

Alcoa used to be a staple investment in many investors’ portfolios when the company was worth $45 a share. Today, it’s clear the stock hasn’t come far enough along fundamentally to justify the triple-digit upswing in its share price since the market lows.

Just like Citigroup, I rate Aloca a D, making it a sell, despite its seemingly bargain price.
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A Bargain Isn't a Bargain If It's Worthless


It's true that these stocks and others like them are trading at a fraction of what they were just a few years ago, because the value they currently offer shareholders isn’t worth more than that. They simply don’t yet have what it takes to stage a return to their previous highs.

Don’t let the blue light special prices of these blue chip stocks fool you into thinking that they’re good bargains right now. Alcoa may have been worth its $45 share price at one time, but times have changed and there’s nothing to suggest that this stock, or the others I’ve mentioned, are any closer to their glory days than they were when the market bottomed just seven months ago.

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