I’m looking at four stocks who’s prices have fallen incredibly this past year, and appear to be deep value stocks. Trying to decide whether to purchase them or move on.

Here are some numbers:

Herbalife (HLF): Growth at a Reasonable Price – if their selling tactics survive the SEC
Herbalife stock price has again fallen back into my ‘buy zone’ which I described in the prior article ‘Herbalife Valuation using Buffet’s ‘3 Pillars’ Approach Yields 25% One-day Return.‘ In that article I mentioned my calculated Intrinsic Value for HLF was $77.20. At a current price of $51.49, HLF seems to offer a meaningful discount to value.

Some famous investors have divergent views on HLF. Hedge fund manager Bill Ackman has a well-publicized $1 Billion dollar short position. Ackman’s thesis is that HLF sells it’s products thru a Ponzi scheme (where the prime directive is to recruit new investor/customers instead of sell product to end users), and his publicity about this has lead to an SEC investigation. Meanwhile Carl Icahn, legendary value investor, purchased nearly 17% of the stock when it dropped after Ackman announced his short position.

Herbalife is a hot topic for debate between authors on websites such as Seeking Alpha and GuruFocus, each taking either the bull or bear side. I’ve read most of these articles and visited the Herbalife website. What I’ve seen does concern me that their main focus is to recruit rather than make sales. Herbalife claims they are a Multi-Level Marketing (MLM) company – similar to say Avon. Herbalife seems to market to lower income people making ‘get-rich-quick’ promises. I don’t want to invest my money in a Ponzi scheme.

Herbalife insiders recently bought stock for themselves, generally a good sign for a stock. But it seemed almost a coordinated move, perhaps a planned reaction to the bad publicity from Ackman’s recent ‘tell-all’ presentation about his short position.

For the DCF model I use to value HLF, I’m going to reduce my forward growth expectations to a more reasonable 6%, from 17%. This will reduce my calculated Intrinsic Value, and will be kept on the Stock Watchlist, available on my Portfolio page.

Aeropostale: A double if it can survive bankruptcy
ARO meets a lot of deep value metrics. I’ve never seen a stock show up on my screen selling for one times its prior peak earnings! Aeropostale is suffering perhaps the worst of all teen retailers the past few years. Mall traffic is down, teens are spending their money on electronics instead of clothing, and ARO has done poorly keeping up with teen fashion changes the past few years. Aeropostale stock price is down 74% in the past year, and bankruptcy is a legitmate concern as they are burning cash to stay alive. They required a cash infusion from Sycamore Partners to stay alive this year.

But Aeropostale has a reorganization plan. They are closing under-performing stores, opening new outlet stores, and most importantly are teaming with some teen fashion icons such as Brittany Motta, a Youtube sensation, who is bringing traffic back into the stores. I visited an Aeropostale this weekend at our new Outlet mall nearby. Good news – Aeropostale was the busiest teen store I saw. Bad news – the traffic may have been related to the low – almost firesale – prices and discounts being offered. They were handing out scratch-off tickets worth 25-50% off the TOTAL price to everyone who entered the store. This seems desperate, a tactic I’ve read that retailers think that ‘Revenue will save the day.’ This ARO store will bring in the revenue, but I don’t see how profit margins will be acceptable. Seems they might be trying to maximize revenue for a potential bankruptcy filing after the holidays.

If Aeropostale can survive this fall retail season, the stock could easily double.

American Public Education (APEI) and ITT Educational Services (ESI)
For-profit education companies have been hit on multiple fronts. Regulators are coming down hard on their graduation rates and lending practices. APEI and ESI face increasing competition from brick-and-mortar universities, who are now offering their own online classes and degrees. APEI seems in better shape than most for-profits, catering to military families. My first Intrinsic Value calculation had them undervalued at today’s prices, but I’m going to revise my growth lower.

ITT (ESI) is being sued by the federal government over predatory lending allegations. In addition, it has missed its 2013 full year and 2014 first quarter earnings results and a summer deadline for filing its annual financial report with federal regulators. Those situations have opened ITT to potential sanctions from the U.S. Department of Education, including a cutoff of the federal student aid money that is its lifeblood. The company’s CEO recently announced his resignation, and a potential money-raising deal that would have sold off several of its properties fell through. The stock has sold off incredibly, down to what was cash on the books as of end of 2013. Problem is they haven’t finalized the recent financial reports, so it’s hard to tell how much cash they are burning through.

Summary

These types of stocks are often best purchased in groups in order to diversify the risk. One may go out of business, but perhaps you double your money on another leading to a decent investment average. It’s the kind of ‘cigar-butt’ investing Ben Graham was known for, and Warren Buffet did in his early years. It’s not what I prefer, I would rather hold ‘Great Companies at Good Prices’, that an older Buffet is known for.

ARO and ESI in particular offer a compelling risk/reward. They will double or triple if some good news comes their way.
I’ve revised some intrinsic value estimates for these stocks, and don’t anticipate buying them right now.