Bargain-chasing investors must take care to separate spring-loaded value stocks from truly troubled businesses. Today, I'm taking a look at three stocks that have fallen at least 20% in 2017, and at least 10% of their shares are still being sold short. As it turns out, only one of these three tickers looks like a solid investment idea today.
The stocks under my microscope are Snap, Inc. (NYSE: SNAP), IMAX Holdings (NYSE: IMAX), and Frontier Communications (NASDAQ: FTR). Read on to see what's wrong with two of these companies, and why the third one is a superior business.
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By the numbers
What's going on here?
You can make a fair argument that all three of these stocks have earned their drastic haircuts this year.
- Snapchat launched onto the public stock market at an overheated valuation, and it didn't take long for investors to adjust their expectations downward when the digital media-sharing company started to report lackluster results. The market cap quickly followed suit.
- Big-screen entertainment specialist IMAX is suffering along with the cinema sector at large. Theater chains are reporting dismal results, as movie lovers are choosing to stay home and wait for Blu-ray or Netflix releases rather than rushing to the movieplex. IMAX is not immune to these changing consumer habits, and its results have been lackluster in 2017.
- Frontier bet the farm on a $10.5 billion buyout of Verizon Communication's landline business in California, Texas, and Florida. That agreement has failed to pay for itself, and large interest expenses on the deal-related debt weigh heavy on the company's income statements. Frontier has resorted to reverse stock splits and dividend cuts just to stay afloat.
One of these stocks is not like the others
You won't find me eyeing the "buy" button for Frontier or Snapchat anytime soon. Their troubles are more than skin-deep, and I don't expect either one of these companies to turn things around anytime soon. IMAX is different.
The company's immersive cinema experience is the cure for the common movie. A full-fledged IMAX installation, with screens larger than your field of vision and dozens of precision-engineered speakers, delivers a movie presentation that even a high-end home-theater installation will find difficult to match.
That's why IMAX can deliver 35% top-line growth at a time of 14% lower box-office numbers for the industry as a whole. Yes, IMAX is struggling a bit, but this is a company that has figured out how to swim against the current of an imploding market sector. Movie audiences are willing to pay an IMAX premium, especially for visually rich blockbusters such as Dunkirk and Blade Runner: 2049.
Looking forward, IMAX's management isn't sitting on its laurels. The company is retooling its distribution strategy to include fewer 3D releases and a faster expansion in China. These efforts dovetail with a larger cost-cutting effort, and should keep the bottom line growing for years to come -- despite the unstoppable cord-cutting turmoil going on around IMAX.
This is a plunging stock that I can see getting back on its feet again. Starting from bargain-basement share prices, this could be a great time to bet against the large short-seller cohort and start a bullish position in IMAX.
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