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While many companies' shares are rising past their fair values now, others are trading at potentially bargain prices. The difficulty with bargain shopping, though, is that you may be understandably hesitant to buy stocks wallowing near their 52-week lows. In an effort to separate the rebound candidates from the laggards, it makes sense to start by determining whether the market has overreacted to a company's bad news.
Here's a look at three fallen angels trading near their 52-week lows that could be worth buying.
This Buffett holding provides great long-term value
We'll begin the week in the healthcare sector by checking out a longtime holding in investing mogul Warren Buffett's portfolio: DaVita (DVA -1.65%). DaVita owns and operates kidney dialysis centers and handles related lab services for patients suffering from chronic kidney failure or end-stage renal disease.
DaVita's woes, and the reason it's currently trading at a 52-week low, can be traced to two issues. First, DaVita lowered its full-year outlook following the release of its second-quarter results. Having previously guided to between $1.8 billion and $1.95 billion in full-year sales, the company now expects to report $1.785 billion to $1.875 billion in fiscal 2016. It also lowered its operating income forecast for HCP, which adversely affected its full-year EPS estimates.
Secondly, DaVita has faced fallout from a request by the Centers for Medicare and Medicaid Services for information pertaining to whether dialysis companies, including DaVita, steered patients to enroll in Obamacare (officially the Affordable Care Act) because it leads to bigger reimbursements.
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While DaVita's recent string of bad news has been disappointing for longtime shareholders, there doesn't appear to be much to worry about with regard to the company's long-term growth prospects. According to the U.S. Census Bureau, the elderly population is expected to grow by more than 40 million between 2012 and 2050 to 83.7 million. Elderly patients are far more likely to require dialysis than younger adults, which could mean a steady influx of patients is in DaVita's future.
DaVita's size also gives it an advantage. DaVita currently controls around a third of the outpatient dialysis market, and though its business is primarily based on insurer reimbursements, which can include Medicare, its large market share provides ample pricing power with private insurance companies.
Following its recent slide, DaVita is now valued at just 14 times forward earnings and it's very capable of mid-to-high single digit profit growth over the long-term. In other words, it's very much worth a look for value investors.
This isn't a Guess?-ing game
Another company value investors may want to pay attention to is mall-based retailer Guess? (GES 0.87%).
As you'll see with every company in this week's column, Guess? Is trading at a 52-week low following a less-than-stellar quarterly report. Even though Guess? shares popped following its second-quarter results in August, the gains were short-lived after Wall Street digested that sales for the company had dipped 1% in the Americas (on a constant currency basis), 6% in Asia, and that licensing revenue dipped 13%.
With most retailers struggling in a tight spending environment, some investors would just as soon avoid the sector altogether. However, avoiding Guess? at these reduced levels could be a mistake.
Image source: Flickr user Mike Mozart.
The biggest hurdle for Guess? which I don't view as a long-term issue, is the company's transitioning business model in fast-growing China. Guess? has doubled the capital it's set aside for building out its infrastructure in China in order to take advantage of the country's superior 7% GDP growth. With the company transitioning to a direct model, growth should reaccelerate relatively soon.
A number of strategic initiatives introduced over the past year should also allow Guess? to strength its brand, which in turn could help with customer engagement and loyalty. CEO Victor Herrero outlined a new social media and digital marketing campaign that'll purposefully target a younger generation of buyers than it's previously targeted. Furthermore, Guess?'s management team is placing a lot of emphasis on reeducating its sales force to better understand what products the consumer is after. Finally, a more efficient supply chain should lead to improved margins.
Following its recent slide Guess? is now valued at less than 16 times forward earnings and paying out a market-trouncing 6.6% dividend yield. Even if Guess?'s yield dips a bit, this should be more than enough incentive for value and income investors to stick around for the long run.
A value stock to cure investors' ills
We'll end the week in the same fashion that we began it: by dipping our toes into the healthcare sector. This time, though, value investors will want to keep a close eye on biotechnology company Vertex Pharmaceuticals (VRTX -0.27%), which admittedly doesn't look like a "value stock" on the surface.
Vertex's recent woes can be traced to the release of the company's third-quarter earnings results on Tuesday, Oct. 25. For the quarter, Vertex reported $413.8 million in revenue, a 33.6% increase from the prior-year period, with next-generation cystic fibrosis drug Orkambi doing the majority of the work. Sales of its lead drug grew by more than $100 million to $234 million from the prior-year period. On an adjusted basis, Vertex reported EPS of $0.16, reversing a $0.13 per share adjusted loss in Q3 2015. Comparatively, Vertex's EPS was $0.03 shy of estimates, and sales of Orkambi underwhelmed relative to Wall Street's consensus.
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Even though Vertex didn't live up to Wall Street's lofty expectations in Q3, it doesn't mean investors should shun the stock. In fact, the drop in Vertex's share price could present an intriguing buying opportunity. Usually I'm not a fan of buying into biotech growth stories that are heavily concentrated in a single drug or two, but in the case of Vertex there isn't a company remotely close to challenging its cystic fibrosis dominance. With little competition and statistically significant efficacy, Vertex's already high price point for Kalydeco and Orkambi could become more palatable to insurers over time.
Vertex's pipeline also has a number of label expansion opportunities and new combination therapies. Last month the Food and Drug Administration approved a supplemental new drug application for Orkambi, expanding its use to children ages 6 to 11 with two copies of the Fdel508 mutation. An expansion in the EU is expected as well. Vertex now has access to another 2,400 patients in the United States with its expanded label.
Longer-term, Vertex has multiple combination studies ongoing with next-generation compound VX-661, known as tezacaftor. Tezacaftor hasn't demonstrated any safety red flags in clinical studies, and its expansion in cystic fibrosis could add another $500 million in annual sales according to Wall Street analysts. Vertex also has a handful of ongoing early and midstage oncology studies that could prove promising.
Though Vertex's forward P/E of 32 may not seem very "value" oriented, its total sales are expected to explode from $1 billion in 2015 to as much as $3.6 billion by 2019. Over that same span it's expected to turn an annual loss of $1.11 per share in 2015 into a nearly $6 per share annual profit. That qualifies Vertex as both a growth and value stock for investors to consider owning.
