Among the biggest losers in Thursday's early trading are
School Specialty (Nasdaq: SCHS)
Top Percentage Losers --Thursday, June 10,
Company Name (Ticker)
|School Specialty (Nasdaq:
|Contango Oil & Gas Co. (
*Table includes companies with minimum market
capitalizations of $200 million and three month trading
volumes of at least 100,000 shares. All percentage returns
are listed as of 11:00AM Eastern Standard Time . Click on
ticker symbols for up-to-the-minute price quotes and
percentage gain data.
Walgreen: the Law of Unintended Consequences
announced that it was going to steer any new customers toward
pharmacy benefit managers (PBMs) other than
CVS Caremark (
, the company likely assumed that CVS would be grateful to still
have the ongoing business from Walgreen's existing set of
customers. CVS's announcement earlier this week that Walgreen can
take all of its business elsewhere -- thank you very much --
appeared to catch Walgreen off guard. Suddenly, its customers need
to quickly get signed up with a new PBM.
Walgreen's consumers who are absolutely dependent on the timely
receipt of medicine may be getting spooked by all of the corporate
drama, and may take their business elsewhere. That concern is
pushing shares of Walgreen down another -3% in Thursday trading,
leading to a -20% drop over the last month.
Action to Take -->
None. This is just too hard to handicap. Walgreen may find an
alternate PBM very quickly and seamlessly migrate its customers in
a rapid fashion. Walgreen and CVS may also kiss and make up. Or
Walgreen may take a serious blow from defecting customers. We
simply don't know. Shares will likely be well higher or well lower
when the dust settles. They're just marking time at $29 as
investors wait to see a positive or negative resolution. In the
event of a really sharp drop in shares, back toward the $20 mark
where they were 18 months ago, investors should pounce, as Walgreen
has a sizable retail footprint that will eventually produce
historically adequate profit margins.
Contango lower on Updated Drilling Results
an offshore driller focused in the Gulf of Mexico, are off -5% in
Thursday trading, but not for the reasons you'd think. Indeed,
shares of Contango had fared well relative to other Gulf drillers,
dropping less than -20% in the recent sector plunge. That may be
because Contango barely has a following on Wall Street, with just
one analyst providing coverage.
Contango's share price weakness today is a function of updated
drilling results. The company found that a once-promising oil patch
in the Gulf is a lot less promising than had been thought. As a
result, the company is now sitting on about -15% less oil and gas
than it previously estimated. But it's worth noting that even with
that downward estimate, the value of its untapped reserves is still
more than $1 billion or 30% higher than the company's market value
. That gap is typical, as investors like to apply a hefty discount
to the value of potential reserves stuck in the ground.
The other takeaway here is that Contango is estimating the value of
its reserves at current oil and gas prices. But many expect natural
gas, which are stuck near multi-year lows, to rise in value as the
economy rebounds. Any spike in natural gas prices would yield a
commensurate boost in the stock.
Lastly, buried in the press release was a comment form management
that is likely being whispered throughout the industry: "The
concept of unlimited environmental liability for a spill, or a
limit so high that a debt-free company with an approximate $1.0
billion market cap like Contango is in essence, asked to 'bet the
Company' every time we drill a well. The move in recent days by
some in Congress to retroactively change the law regarding
environmental liability does not give me great confidence in our
government. Nor do comments about 'boots on throats.' The second
area that causes great concern is the thought of going to jail for
a judgment error or equipment failure - especially if the MMS
approved the procedures that were being followed."
This is indeed a tricky time for drillers, regulators and
investors. Regardless of how you feel about the industry and its
practices, the Gulf Coast remains a vital part of U.S. energy
policy, and it's hoped that the heated rhetoric coming from all
sides can eventually cool. Government bashing doesn't help. Company
bashing doesn't either.
Action to Take -->
As the dust settles on where government policy, natural gas
pricing, and this summer's hurricane impact are processed,
investors will have a fresh chance to identify whether Contango or
other offshore drilling stocks hold deep value. Right now,
investors are making bets in the dark.
School Funding Starts to Bite
Dissecting the quarterly results from
School Specialty (Nasdaq: SCHS)
creates a real conundrum for investors. The supplier of textbooks
and other curriculum aids is starting to feel the impact of recent
education budget cuts. And management notes the fiscal year that
just began will bring a further noticeable drop in sales. Shares
are off -6% in Thursday trading. And they now trade at only about
40% of the value they held back in the middle of the last decade.
Clearly, any company that sells its goods and services to local
governments and school systems is going to see tough sledding for
at least the next year or two. But for long-term investors, it may
make sense to start to look closely at these companies. The longer
that demand stays in a funk, the greater the snapback they'll see
as budgets loosen up. A lot of the goods they sell wear out, and
will eventually need to be replaced.
School Specialty is a fine example of how investor patience should
eventually pay off. The company has aggressively cut costs, so
profits aren't falling as fast as sales. In the just completed
fiscal year, School Specialty earned $1.37 a share, but more
important, generated nearly $5 a share in free cash flow . With
today's sell-off, shares trade for less than four times that figure
on a market capitalization basis and less than eight times on an
enterprise value basis. Strong free cash generation should allow
for debt pay-downs, so shares really trade for about six times free
cash flow on a projected 2012 enterprise value basis. And that year
is likely around the time when sales and free cash flow should
spike higher as school budgets loosen up and the company's new
lower cost structure should really shine.
Action to Take -->
Investors need to shift their thinking in this market. Rather than
just pursuing shares that look like appealing quick gainers, they
should also expose their portfolio to stocks that are now quite
cheap and lack near-term catalysts, but which can be expected to
reward investors nicely over the long haul. School Specialty looks
like just such an example.
In a similar vein, investors should research
Tyler Technologies (
, which provides IT systems to local governments. Tyler may get hit
hard in the near-term if budget cuts lead to sales declines. If and
when that happens, shares would fall and then look more appealing
to long-term investors looking to get in ahead of rebounding
budgets a few years out.
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.