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.
Don't write off this sector just yet
Want to know a surefire way to scare an investment banker away with two simple words? Just say "mortgage REIT" and you'll likely see him or her scamper away.
The mREIT sector has been nothing short of slammed over the past quarter on speculation that the Federal Reserve will begin winding down its $85 billion in monthly bond purchases, which have worked in mREIT's favor by keeping long-term lending rates at historically low levels. I, however, see things a bit differently and think plenty of opportunity still exists here, including with American Capital Mortgage Investment (NASDAQ: MTGE ) .
There are two ways to play the mREIT sector. The first method is by purchasing agency-only mREITs like American Capital Agency. Agency-only mREITs purchase mortgage-backed securities and mortgage loan assets that are fully backed by the U.S. government in case of default. Often this means agency mREITs can utilize high leverage ratios but usually deliver lower net interest margins. American Capital Agency has used this leverage to its advantage and currently delivers a projected yield of 20%!
Then there's the second method, which is by purchasing hybrid companies that buy agency and non-agency MBS's. Non-agency loans aren't backed by the government, which means any defaults are taken as losses on the balance sheet. The trade-off is that non-agency loans yield much higher net interest margin rates.
For American Capital Mortgage, investors seem hell-bent to focus on its non-agency risk when just $727 million of its $11.8 billion investment portfolio is tied up in non-agency investments. Other metrics, including its leverage ratio of 4.9 and net interest margin of 1.90%, appear to be well in line with the sector average. Furthermore, American Capital Mortgage is trading at just 68% of its book value, implying that investors may be emotionally overreacting on this move lower.
Even if American Capital Mortgage had its payout halved, it would still net investors close to 10%. I think this is an mREIT you need to dig more deeply into.
Screening for great deals
If you're looking for a potentially undervalued medical device and diagnostics company, consider looking no further than Hologic (NASDAQ: HOLX ) .
With Hologic completing the sale of its Lifecodes business segment to Immucor in March and Europe consistently weighing down medical device and diagnostic sales lately, investors have multiple reasons to be skeptical of Hologic's impending growth slowdown. With a forecast sales growth rate of 26% in 2013, it's a bit disappointing to see sales growth slow to just 6% next year. But I see multiple growth drivers on the horizon.
Nothing in Hologic's pipeline of products offers more promise than its 2D + 3D mammography Affirm breast biopsy guidance system. One of the biggest challenges in diagnosing and treating breast cancer is getting an accurate and detailed view of the area of concern. Hologic's mammography products are making this process quicker, cheaper, and more reliable for patients. This should be an area of big growth given that breast cancer is the second-most diagnosed of all cancer types.
Another overlooked factor is that Hologic is a niche company in women's health. Because women statistically live longer than men, this means a company like Hologic will be able to sell its diagnostic and medical products to female patients for a longer period of time than, say, a medical device and diagnostic company focused solely on men.
At 11 times forward earnings and with a sea of potential growth in breast cancer screening, Hologic is a name I believe you should have a close eye on.
Living in a renter's paradise
The last quarter has been rough on housing and office space real estate investment trusts, with 30-year mortgage rates spiking from less than 3.5% to as high as 4.75% recently. Low lending rates were one of the keys fueling the housing rally higher, so higher lending rates stemming from the potential wind-down of QE3 could serve to stymie growth. Yet for residential-REITs like Mid-America Apartment Communities (NYSE: MAA ) , the effect would actually be extremely positive.
Mid-America Apartment, which thankfully has a much shorter moniker in MAA, is already enjoying very high occupancy rates of 96.1% as of its most recent quarter. Where it's really benefiting is with regard to rental rates. Vacancies for apartments are already low, but with mortgage rates rising, the incentive to purchase a home is quickly dwindling away. Instead, prospective homebuyers may choose to rent and wait out the next drop in interest rates. This expected influx of renters into an already tight market only serves to boost MAA's pricing power. Not surprisingly, rental rates were up 4.7% in the past quarter.
Another growth driver looks to be its pending $8.6 billion merger with Colonial Properties Trust (UNKNOWN: CLP.DL ) . The combined entity would become the second-largest U.S. based residential REIT, with 85,000 apartment units. Opposition to the deal from some of Colonial's shareholders does exist, but comparatively speaking, MAA is in great shape either way. It already has a high occupancy rate, and the addition of Colonial's properties would only further serve to enhance its rental pricing power.
With a yield in excess of 4%, MAA could have years of good time ahead if lending rates continue to trickle higher.
Sometimes investors need to be reminded that macroeconomic events that can affect a large group of stocks don't necessarily hold true for every stock in a sector. QE3 may pose challenges to mREITs and residential-REITs, but there are certainly hidden gems mixed in with the possible losers. The same goes for Hologic with regard to its promise in women's diagnostics, even with Europe weighing on most of the health care sector.
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