3 Stocks Near 52-Week Lows Worth Buying

Do these three fallen angels deserve a second chance? You be the judge!

Jun 10, 2014 at 1:45PM

Just as we examine companies each week that may be rising past their fair values, we can also find companies trading at what may be bargain prices. While many investors would rather have nothing to do with stocks wallowing at 52-week lows, I think it makes a lot of sense to determine whether the market has overreacted to a company's bad news, just as we often do when the market reacts to good news.

Here's a look at three fallen angels trading near their 52-week lows that could be worth buying.

Interconnect your portfolio to this value play
Let this first pick be a reminder to not fall in love, or hate, with any stock.

This week's first potential value play is Mellanox Technologies (NASDAQ:MLNX), a provider of end-to-end interconnect solutions that help optimize the transmission of data between users and servers or storage devices to improve transmission speeds and efficiency. I admit that in July 2012, Mellanox made my naughty list and was among my three selections near 52-week highs worth selling. My thesis back then was pretty simple: valuation, valuation, valuation! At the time, the company was valued at 70 times forward earnings and about 10 times total sales, and it relied on the struggling Hewlett-Packard for a significant chunk of its sales.

Fast-forward two years and a 70% drop later, and it would appear Mellanox has become an intriguing value play.

Mellanox

IS5300-324-port 20 and 40 GB/s InfiniBand Chassis Switch. Source: Mellanox Technologies.

As Mellanox's latest quarterly results show, there's still some cyclical weakness in its business. Total revenue fell 6.5% to $98.7 million, with the company noting spending weakness from a major customer (again, this could be HP). However, there were also some notably positive figures buried within its report. Non-GAAP margins, for instance, ticked higher by 50 basis points to 68.6% from the year-ago period despite the decline in revenue. What this signals to me is that Mellanox is seeing a more favorable mix of product, which will benefit shareholders immensely when cyclical orders do pick up.

Also, as Mellanox noted in its first-quarter results, it anticipates a return to orders growth in the second half of the year. I find its outlook quite plausible, considering that the polar vortex constrained spending for nearly all sectors in Q1, and IT-infrastructure spending on data centers will only increase in the coming years. Keep in mind, as well, that HP's future is intricately tied to the cloud, therefore it will continue to play in an important role moving forward for Mellanox.

From a fundamental perspective, Mellanox is now only trading at 20 times forward earnings with a projected five-year growth rate in the mid to high teens. That places its PEG ratio slightly over one, which is perfectly reasonable considering its expanding margins. Furthermore, Mellanox is also carrying around $334 million in net cash on its balance sheet, or more than $7 per share. This cash acts as a nice downside buffer in case of extended cyclical downturns.

While it's impossible to pinpoint exactly when Mellanox will bottom, I do believe we're getting very close and would suggest tech-savvy investors give this stock a closer look.

Oil is thicker than short-sales
The second pick this week is an oil and gas master-limited partnership from Oklahoma: Mid-Con Energy Partners (NASDAQ:MCEP).

"Why is Mid-Con traipsing along near a 52-week low?" you're wondering. From what I can tell, there are two factors holding down its shares. First, the stock market has been heading precipitously higher, increasing the risk appetite of investors and keeping them safely away from defensive stocks with high yields such as Mid-Con Energy Partners. This cyclical shift has definitely put a damper on its recent performance.

Also hurting its shares are the company's first-quarter results, released five weeks ago. Its results did show a 4% year-over-year increase in production to 2,622 barrels of oil equivalent per day. However, its results also led to a decline in distributable cash flow (DCF) to $10.1 million from $12 million in the year-ago quarter, as its coverage ratio dipped from 1.2 to just 0.92. What this would imply to investors just scratching the surface is that Mid-Con's current dividend payout is unsustainable and that a dividend cut may be around the corner.

Www
Source: Justin Vidamo, Flickr.

I believe this couldn't be further from the truth. During the quarter, Mid-Con acquired assets in Oklahoma, which adversely affected its DCF and reduced its DCF coverage with the addition of 1.5 million units issued in February of this year. As Mid-Con Energy notes, it didn't begin experiencing the benefits of higher per-day production until late in the quarter. Chances are -- especially if Wall Street has lowered its expectations following the company's first-quarter results -- that Mid-Con can handily top analyst projections in the second quarter.

Another point of contention is that Mid-Con Energy Partners is almost an oil pure play. By focusing on a specific region of Oklahoma with established wells, the company was able to produce 232 million barrels of oil in the first quarter with just 21 MMcf of natural gas (the equivalent of just 4 million barrels of oil). In other words, Mid-Con's oil production accounted for 98% of its revenue in Q1 2014, which makes its cash flow and outlook very predictable -- and investors love predictability.

Lastly, I don't care whether the market is soaring or dropping like a rock; a sustainable yield in excess of 9% is always favorable for investors. This is more than double the rate you'd get from a long-term T-Bill, plus you have the opportunity for price appreciation as Mid-Con's production improves. For those of you looking for a strong dividend to add to your portfolio, consider giving Mid-Con a closer look.

Trade the trends
Sometimes you have to look past the current numbers and examine the long-term trends to fully understand the potential of some companies. For example, looking at a much larger picture makes sense when it comes to CME Group (NASDAQ:CME), the world's largest derivatives marketplace.

While most investors dislike volatility and prefer the ability to sleep well at night, a lack of volatility is the enemy of CME Group, which needs institutional and retail investors to execute trades to earn its profit. With the VIX near multiyear lows, investors simply haven't been as enticed to purchase options, except perhaps in the metals market, which remains volatile.

Www
Source: Baer Tierkel, Flickr.

The lack of volatility has clearly worked against CME Group, with Wall Street only expecting the derivatives giant to turn in 5% revenue growth in 2014 after consistently growing its top line by double digits. However, the good news is that the long-term trend would indicate that volatility tends to peak and trough in cycles, meaning CME's contracts traded are likely to pick up sometime soon.

As with the previous stocks, pinpointing an exact bottom in the VIX is practically impossible, but we know for a fact that stock market crashes now and then, and the causes for them are often unpredictable. Put simply, fear will rear its ugly head at some point in the future, and it will cause a surge in trading volume for CME Group.

If we look at CME from a fundamental perspective, the company has a projected five-year growth rate of a healthy 13% and is currently being valued at just 18 times forward earnings following its latest drop. Compound this with a dividend yield that's approaching 3%, and I believe you have more than enough reasons to consider taking a shot with this dominant derivatives play.

These three stocks could deliver big gains, but they may ultimately pale in comparison to the potential of this top stock
Give us five minutes, and we'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year, his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252%, and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers