Just as we examine companies each week that may be rising past their fair value, we can also find companies potentially trading at bargain prices. While many investors would rather have nothing to do with companies tipping the scales at 52-week lows, I think it makes a lot of sense to determine whether the market has overreacted to the downside, just as we often do when the market reacts to the upside.
Here's a look at three fallen angels trading near their 52-week lows that could be worth buying.
Not playing around anymore
The video and online gaming sector is highly competitive, and pricing power stinks for the most part. As gaming shifts further from traditional consoles onto mobile and PC platforms, bricks-and-mortar retailer GameStop (NYSE: GME ) has taken it on the chin. However, we've reached the point where GameStop's valuation has become too enticing to ignore.
Why invest in GameStop if sales are stagnant? First, the company understands the shift toward online gaming and now distributes PC games in addition to traditional console games and could push further into the digital market. Second, the ability to trade in used video games for credit gives the company a chance to hook customers for life and provides high-margin added growth. Finally, it's still very profitable. By trimming the fat and operating within its means, GameStop has accrued $329 million in cash, has zero debt, and has averaged $405 million in free cash flow over the past five years.
All of this adds up to a company that has become an income investor's dream with the initiation of a $0.15 quarterly dividend in February. Its current yield of 3.6% places it among the tech sector's elite yielders, and its payout ratio remains extremely subdued at just 19% of expected 2012 EPS.
By the looks of STMicroelectronics (NYSE: STM ) , you'd have absolutely no clue that its motion-sensing three-axis gyroscope and accelerometer are a part of the Apple (Nasdaq: AAPL ) iPhone 4 and 4S, and the iPad 2. You'd think that being part of something as large as the iPhone, which sold 35 million units last quarter, would be enough to move this stock higher, but that just hasn't been the case -- although it should be!
STMicro is cheap, but for two primary reasons. First, it's highly dependent on economic cycles to drive its growth. What that means is it's not a stock you want to hang on to for 10 years at a time. It's primarily a good one-to-three-year buy-and-hold when the chip sector is cycling higher. Secondly -- and this builds on reason one -- sales have been stagnant since 2006.
In spite of this, STMicro has strong ties to Apple and is one of the leading suppliers of microelectromechanical systems, or MEMS, in the world. That niche, combined with its $770 million in net cash, its greater-than-7% dividend yield, and the fact that it's valued at just 55% of its book value, makes it a very intriguing value play.
Pedal to the metal
You'd best sit down for this one, because I'm about to recommend... drum roll, please... a U.S. car company! The bankruptcy of General Motors (NYSE: GM ) still doesn't sit well with many Americans, but it's really hard to ignore just how much better it looks when compared to Ford (NYSE: F ) nowadays.
When GM declared super-duper bankruptcy in 2009, the company had more than $90 billion in net debt. Now, just a few short years later, GM has a net cash position of $17.2 billion (and a market value of only $30.4 billion). Ford, on other hand, declined federal assistance during the downturn, but is still crippled under $77.4 billion in net debt.
There are also recent growth figures that show GM is performing considerably better than Ford. In June, GM's total unit sales rose by 15.5% compared to Ford's, which rose 7.1%. Granted, Ford has turned in a higher aggregate unit-sales increase year to date, but that comparison could be switching and swaying in favor of GM now that it's worked out the "kinks" with the Chevy Volt. With the stock at less than five times forward earnings, I'm going to give GM another chance, but I'm putting it on a very short leash.
Another week of big names hovering near new lows despite the market's overall resistance to negative news. All three offer deeply discounted value, are well-known names within their niche, have strong net cash positions, and (minus GM) pay a premium dividend (though give GM a few more years and it will be there, too).
I'm so confident that these three names will bounce off their lows that I'm going to make a CAPScall of outperform on each one.
In the meantime, consider adding these potential winners to your free and personalized Watchlist, and get your own personal copy of our special report: "The Motley Fool's Top Stock for 2012." Find out which company our chief investment officer has dubbed the "Costco of Latin America." Best of all, this report is completely free, so don't miss out!
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