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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.
This isn't the Mayan apocalypse
With the recent trading activity in diversified health care solutions provider Endo Health Solutions (NASDAQ: ENDP ) you'd think the company was barely struggling to stay alive. Don't get me wrong, Endo has had its fair share of recent problems with an ongoing government investigation into Lidoderm, a numbing agent, as well as a settlement with Watson Pharmaceuticals (NYSE: ACT ) that'll allow Watson to introduce its own generic version of Lidoderm this year. Also, an older version of Opana ER, an extended-release form of oxymorphone, has been discontinued, which is expected to cut into sales.
Yet for all these negatives, even a slightly lowered fiscal 2013 forecast isn't enough to send me running for the hills. Even if revenue declines by around 4% next year as management predicts, if Endo can hit the midpoint of its $4.40 to $4.70 EPS guidance it'll be valued at less than six times forward earnings. Endo's product portfolio, which includes both branded and generic elements, as well as medical devices and technologies, especially in areas of unmet needs, gives the company an incredible amount of diversity to help weather downturns like the one it's experiencing now. About the only aspect missing here is a dividend, which could be instituted if Endo can pay down some of its nearly $3 billion in net debt -- but I'd hardly call that a selling point.
2014 can't come soon enough for some
In early December I stated publicly that one sector of the market you could buy into well ahead of the implementation of the Affordable Care Act in 2014 is managed care providers. Specifically, today, I want to take a closer look at why WellCare Health Plans (NYSE: WCG ) , a provider of government-sponsored Medicaid, could be an incredible value.
It probably goes without saying that the Medicaid expansion built into the Affordable Care Act that will extend coverage to 16 million new Americans will be a boon for Medicaid providers like WellCare. As of 2011, WellCare controlled about 3% of the Medicaid market, which means it could add close to 500,000 new Medicaid-approved customers over the next year as health insurance becomes a mandate. While these may not be the highest-margin customers, it should be a big boon having its customer base increase by roughly 20%. Considering that WellCare is valued at a reasonable 9.5 times forward earnings and is extremely well capitalized, I'm willing to take a flier on what looks like a bargain medical-care organization.
Possibly the cheapest electric utility
Yesterday I divvied out my selections for three utilities you could buy in 2013. Not on that list was Great Plains Energy (NYSE: GXP ) , an electric utility operating out of Kansas City and throughout Missouri. While it may not offer the greatest price increase potential, such as what I expect from Exelon (NYSE: EXC ) which should benefit from a transition to alternative energies and a potential U.S. subsidy on nuclear power, Great Plains is nonetheless one of (if not the!) cheapest utilities relative to book value.
As it's trading at just 95% of book value, you'd think Great Plains was busy restructuring its operations, or staving off heavy losses. Instead, the company has been prudently managing its costs while growing its electric business at a reasonable low-single-digit rate. Over the past year, its reliance on coal-fired plants has put it at a distinct disadvantage to its peers, but a surge in natural gas pricing from its lows should help balance out the playing field. Assuming Great Plains receives its requested rate increases and the weather is even halfway close to normal this year, shareholders should be expecting a nice rebound from these levels while also basking in an extremely safe 4.2% yield.
This week's theme is pretty simple: valuation. All three companies boast valuations that are well toward the bottom range of their sectors, and each company offers a promising case for a long-term rebound.
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