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 wallowing 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.
Keying in on efficiency
When I look for downtrodden companies that may be near a bottom I tend to focus on profitable, cash flow-positive businesses. Once in a blue moon, though, an IPO or idea will catch my attention that doesn't fit the mold but nonetheless offers some intriguing potential. This is why I'm starting off with recent small-cap technology IPO Cyan (NYSE: CYNI) this week.
Cyan, which only debuted in May, has lost about half its value since reaching its post-IPO peak and has come under pressure for continuing to produce losses amid higher costs in a tech environment, which seems ruled by cost cuts to drive earnings per share growth these days.
What makes Cyan so intriguing is its product line known as Blue Planet, which is a software-defined network solution that aids enterprises in data center virtualization and improves networking efficiency while helping to reduce costs. As data centers become more prominent, companies like Cyan should see their SDN solutions called upon to help control costs and more effectively manage their infrastructure from multiple locations (not just one central hub) resulting in what I anticipate could be 20%-plus growth potential for the next three to five years.
Unfortunately, Cyan isn't likely to turn a profit until the end of 2014 at the earliest. Like many recent IPOs, it's more about expansion than it is about reining in costs at this point. Therefore, with Cyan set to report earnings after the bell today and not expected to be profitable on annual basis until 2015, it could still be a bit of a bumpy ride, but the long-term prospects of this company look bright to me.
Food for thought
If there's one industry that's been given no love or forgiveness in recent months, it's food processors like Seneca Foods (SENEA 2.20%) (SENE.B 3.16%). Seneca has dealt with an unfavorable product mix and weaker selling prices for its canned fruits and vegetables over the past year, which caused its second-quarter profits, reported last week, to fall by 52% to just $0.59 per share despite a 6% increase in total sales to $336.6 million.
However, things could be about to get better as food inflation has been lower than anticipated for about a year. Food inflation isn't great news for the consumer, but it does provide the impetus that food producers need to raise costs. Seneca already has an impressive number of partnerships under its belt, including an alliance with General Mills to produce canned and frozen vegetables, and should see some relatively easy year-over-year EPS comparisons if food inflation costs head even slightly higher.
From a valuation perspective Seneca also looks particularly attractive at just 90% of its book value and roughly 11 times cash flow. These are well below the industry average and lend credence to the possibility (note this is purely speculation on my part) that Seneca Foods could be a ripe takeover candidate. Clearly, food costs need to cooperate for Seneca to see a robust rebound, but I'd consider rising food costs almost a foregone conclusion at this point.
Geared for success
Sometimes it's difficult to look past a company's near-term earnings disappointment, but that's what I'd suggest you do with networking equipment maker NetGear (NTGR 1.10%), which sank by double digits after reporting its third-quarter results on Thursday and updating its fourth-quarter guidance well below estimates.
In the upcoming quarter, NetGear guided investors to expect revenue of $340 million to $355 million versus the $368.7 million Wall Street had forecasted. The culprit, oddly enough, was weak sales in Europe and the Middle East, which cumulatively sank 6.8% year over year in the third quarter.
Despite these troubles, I'd say now is the time to put your doubts about NetGear aside and seriously consider this company as a solid long-term investment. One factor to consider is that three-fifths of its revenue last quarter came from the Americas (primarily North America). Among the many factors that influence its growth are tech infrastructure upgrade cycles. While the recession put the kibosh on a lot of telecom service spending, the trio of AT&T, Sprint and T-Mobile are spending like mad trying to catch up to Verizon's next-generation wireless technologies. As spending in infrastructure buildouts increase, the expectation would be that networking companies down the line, like NetGear, are going to see benefits from an increase in spending.
Another factor here is simply its valuation relative to its growth potential. Right now, we're looking at a company with $7.79 in cash per share and no debt that is trading at just 37% more than its book value and less than 12 times forward earnings estimates. That is arguably inexpensive for a company that should grow at a high-single-digit rate through 2015. My suggestion would be to use this recent earnings weakness to your advantage and dig more deeply into NetGear.
Foolish roundup
This week's theme is all about overlooking near-term earnings flubs and seeing the longer-term picture. All three companies offer what I believe are attractive valuations relative to their sector and should rebound nicely as losses narrow for Cyan, as food prices increase for Seneca Foods, and as networking investments trickle down the pipeline for NetGear.
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.