“Undervalued Stock of the Month — October”

By Travis Johnson, Stock Gumshoe, October 25, 2007

Well, I referred obliquely to this one in my writeup of a few days ago, but thought I’d take a closer look and see if I was right in my assumptions.

Turns out, I was (for once, at least).

The undervalued stock of the month in April, according to the Half Priced Stocks service, was Getty Images, the big stock photography firm. It was teased as a dominant player in the digital photography market, poised to grow in strength as they acquire competitors and enjoy the benefits of a world awash in digital cameras.

The undervalued stock of the month in October, according to the same people, was again Getty Images (GYI). And again, the ad was pretty much word for word the same, at least in parts.

Now, I’m not against persistence — I do like to see advisers who stick by their ideas with some conviction. But it’s certainly starting to look like even if GYI is a bargain now, it certainly was not one, by most peoples’ assessment, back in April.

You see, the shares are right around $27 now. The last time they were called “undervalued,” they were right around $50. And no, the stock has not split.

So, is this a case of a decent stock getting beaten down, and an adviser taking his lumps and urging you to average down, confident that the shares will turn around? Or is it that the marketers saw that their recommendation got a good response rate in April and they recycled the same ad?

Personally, I certainly find Getty more compelling now than I did the last time I wrote about them in April. They are certainly cheap, at least on paper, right now — the PE is around 11, and analysts are projecting 10% earnings growth, so that’s reasonable (if they’re right). I think their new music licensing initiative is a little silly and off-focus, but they also just inked a deal with Interpublic and they certainly are busy putting photographers to work around the world for the major news and advertising publishers.

Certainly, folks who follow IBD and refuse to buy a stock on the decline, or to average down, would want to stay far away from this one. But that doesn’t mean it’s not worth a closer look … just that there’s some kind of reason out there why it has fallen 50% in a few months, and it might behoove you to figure out what that reason is … and whether your logic can overcome the market’s in this case. It looks like the main culprit for the fall was a minor shortfall in earnings announced in August, accompanied by a more severe cut in earnings expectations due to a competitive pricing environment and some charges for layoffs — so I guess we’ll learn a little bit more about how those reduced expectations are being met next week, they release earnings on November 1.

Oh, and to give them some credit — this group’s pick of the undervalued stock of the month in May was Broadcom at $31, which they said was 27% undervalued. If you took them at their word and sold when it got fully valued, over $40, you’d be quite happy now thanks to the huge runup earlier this month. Of course, if you hadn’t sold at that point you’d be sad, with the share price back down to just about a 10% gain at $34 thanks to this week’s disappointing earnings report.

Best of luck.

Are you getting our free Daily Update
"reveal" emails? If not,
just click here...