Sprint: an example of stocks beaten down in the bear market

Yesterday, I said I am selectively bullish on stocks and bonds. Prices have come down s far that a number of companies are trading under book value. This suggests that investors are so fearful that they are selling anything or that they think these companies are going to zero. Sprint Nextel is a perfect example of this.

Sprint’s stock closed Monday at $3.55, giving it a market captalization of $10.1 billion, while it had more than double this amount in equity on it’s balance sheet in its last quarterly report.

So either Sprint is going to zero or you have a value investor’s dream. Which is it? Understanding the answer to that question for many investments will be key to investing well in this kind of environment.

Dan Hesse, the chief executive of Sprint Nextel, has not found it an easy task righting the wireless carrier that is losing customers at twice the rate of its larger rivals. The credit crisis and the economic slowdown only make his job harder. For the last year Mr. Hesse has been trying to turn the beleaguered Sprint around. And in some areas he is making progress. In a report released last week by Pali Research, Sprint has improved its customer care response times, ranking first in a survey of peers. He has cut costs, with more belt-tightening to come. And he has, literally, put himself out there, imploring customers in television ads to give Sprint another chance.

But at the same time, said Craig Moffett, a research analyst at Sanford C. Bernstein, “he’s still presiding over a business with deep structural problems.” And those are not going away soon.

“He’s got to play the set of cards he’s been dealt,” David Barden, an analyst at Bank of America, said in a recent report, adding that “tougher days will follow.” As a result, Mr. Hesse, he said, “will be called upon to demonstrate real competitiveness. For a sustainable rally in Sprint shares, the business must get better, not simply stop getting worse.”

Mr. Moffett and other analysts warned that the recent credit problems could hurt Sprint because the cost of borrowing money was rising.
NY Times

There are many companies of that ilk. Take the oil and gas sector, pummeled by a 50% decline in oil prices. Valero Energy, the largest U.S. refiner, has a book value of $18.6 billion, but a market cap of $10.5 billion, having been reduced from over $75 a share to as low as $15. It now trades above $20. Why is that?

It was in such circumstances that Warren Buffett bought the Washington Post and GEICO. Discerning which companies have valuable, salvageable assets is a very nuts and bolts analysis. But, one that pays off.

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