Dear Mr. Berko: Two stocks trading below $10 have been recommended to me.
One is Bebe stores, which my stock broker thinks is going to take off again like a rocket, and the other is Synovus Financial, which my brother, who works for a competitor, believes is a “fantastic” buy. In fact, he recently bought 2,000 shares.
I have $7,000 to speculate with and seek your opinion on which of the stocks would be best to buy for a two-year hold. I could either buy 1,000 BEBE or 2,000 Synovus Financial.
Which would you recommend? –T.S., Aurora, Ill.
Dear T.S.: Bebe stores (BEBE, $6.62) doesn’t fly my kite, float my boat or light my pipe. Frankly, BEBE gives me the cold fuzzies. Insiders, those who know the company best, have been selling shares during the past 12 months, and it seems doubtful that BEBE will report positive earnings this year.
BEBE is noted for its distinctive line of women’s apparel, which it designs, develops and sells. Its products include a wide range of separates, tops, sweaters, dresses and accessories in three distinctive categories: career, casual and active.
Since 2007, sales have nosedived, earnings have fallen from 81 cents to a loss last year and an expected loss this year and store units declined from 301 to 255, while cash flow crashed by 70 percent.
Meanwhile, BEBE’s management has been changing faster than customers change their clothes, and the quality of the merchandise seems to be declining. While there are no buy recommendations on the Street, the stock trades at a buck above its $4.70 book value, there’s no long-term debt and each share is backed by $2.27 in cash. And the consensus for 2012 indicates revenue growth of 4 percent, potential earnings of 11 cents and a continuation of the nickel dividend.
BEBE used to be a classy, upscale, luxury retailer, but I think the company has lost that cache. And while BEBE may be profitable in 2012, I doubt those profits will be significant enough to warrant the purchase of 1,000 shares.
Even though BEBE might earn 11 cents, there isn’t a clothing retailer on this planet that’s worth 55 times earnings. Don’t buy the stock.
Synovus Financial (SNV, $2.42) has 6,400 employees and owns 41 community banks throughout the southeastern U.S. Between 1990 and 2006, its earnings were the toast of the town, and SNV became one of the darlings of Wall Street.
Then in 2007, the fit hit the shan. Loan loss provisions exploded twenty-fivefold from $75 million in 2006 to $1.9 billion in 2009, and the share price vaporized from $33 to $1.50.
Credit quality is SNV’s Achilles’ heel. Some believe that SNV has been lending money to members of Congress, making loans to manual typewriter manufacturers and financing the “Cash for Clunkers” program. So SNV took $585 million in write-offs in the final quarter of 2010.
But SNV’s nonperforming-loan ratio is improving, assets are expected to gain slightly next year and loan volume should grow by 6 percent in 2012. Loan loss provision could decline by 25 percent, while interest income and noninterest income are online to improve by 5 percent to 5 percent next year.
In fact, the consensus on the Street indicates earnings for 2012 at 18 cents versus a loss of 20 cents in 2011. Meanwhile, the shares trade at a buck and a quarter below the $3.65 book value, and I expect that the .04-cent dividend will be raised in 2013.
There’s not a soul on the Street that recommends SNV, but I think a 2,000-share purchase can more than double its value in the next two years.
So buy the stock and take your brother to a thank-you dinner in the executive dining room at Burger King.
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