Taking Advantage Of The Early Market Drop

[savio13]

After checking the futures over the weekend, I knew the market was going to drop a lot at the open. Like most people, I was happily surprised that the Fed decided to cut interest rates by .75%, which likely averted a market catastrophe.

What I found even more shocking though is that the market still open down almost 500 points. I knew that this was panic selling (a reaction to the foreign markets) and that cool heads would prevail soon during the day. I thought the market might even be higher for the day, which didn’t happen, but the market did bounce back considerably.

I took advantage of the drop to buy some stocks that I liked at very cheap prices. Here’s some bargains that I found, as well as the reasons I bought the stocks. In full disclosure, I obviously now own these stocks, so I’m biased in their favor. Don’t take my opinions as financial advice.

Jack In The Box (JBX): This major fast food company has taken a beating lately. I’m not exactly sure why this stock is down so much. Even if a recession hits, people aren’t going to eat fast food less. If anything, they’d eat more! I like JBX’s low price/sales ratio, and the company has excellent growth prospects. It’s flagship restaurant, Jack In The Box (it also owns Qdoba), still has a lot of room for expansion in the Eastern United States. Its ratios are all much smaller compared to peers like McDonalds and Burger King. For example, Jack In the Box’s P/S is .5, whereas Burger King is 1.34 and McDonalds is 2.67. These other companies do get much of their sales outside the US, and there seems to be a premium for international exposure in today’s market. But this huge of a gap is silly, especially considering Jack In The Box has much better growth capabilities in its home country. I was able to scoop up quite a few shares around 22.60 when it opened down by a few percentage points, and the stock ended up closing at 25.55 for the day.

Jamba Juice (JMBA):: This is a major smoothie chain that is based in California (where most of its stores are located as well). This stock has been beaten down a lot lately as well, off about 80% from its highs. From what I can tell, the legitimate arguments against the stock are that smoothies are a dying fad and that the company is not currently profitable (and it’s not clear when it will or ever be). Also, a recession caused by housing would likely hit California pretty hard, which might cause people to drink less smoothies.

Here’s the reasons I bought the stock though:

1. The whole smoothies are dying fad thing is well-priced into the stock at this point.

2. It’s difficult to tell what Jamba’s profitability prospects are. Gotta figure it can achieve it though; might just need to shut down some bad stores. After all, it doesn’t take a nuclear scientist to figure out how to run a profitable smoothie store.

3. What I like a lot is the enterprise value/revenue ratio. Jamba has a lot of cash, no debt, and a lot of revenue. It’s enterprise value/revenue is .28. Compare that to Starbux’s of 1.54! Granted, Starbux is actually profitable right now, but I’d find it hard to justfiy buying SBUX over JMBA. McDonalds Enterprise/revenue is 2.88 (Jack in the box is .64, which makes me want to buy more JBX as well.) There seems to be a weird market momentum where people are viewing Mcdonalds as a recession proof stock, but the declining housing market is going to stop everyone from eating at JBX and Jamba Juice. I just don’t think this is the case.

I was able to buy some JMBA at 2.15 (it had closed at 2.34 previously). The stock ended up closing up a little for the day, at 2.37. Sometimes, a sharp drop can provide good buying opportunities!