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.
Plenty of "pawtential"
Sometimes you just have to scratch your head over certain business models that seem destined to succeed and yet struggle to grow. A perfect recent example of this is online pet medication and nutrition supplier PetMed Express (NASDAQ:PETS).
Pets have become more integrated into the American family, and pet product costs have soared. Yet in its fourth-quarter results, released in May, PetMed Express reported a nearly 2% year-over-year decline in profit as net sales dipped to $48.6 million from $51.1 million. A lack of new orders, as well as the frigid winter, put a damper on just about every business segment's sales, so PetMed gets a bit of a flier on this account.
On the plus side, PetMed Express improved its gross margin via strict cost controls and increased its average order to $75 for the full year from $73 in the previous fiscal year. This signals that PetMed's product mix and/or pricing power is improving.
What makes me believe that PetMed could be set for a turnaround is the company's unique business model of using the convenience of online pet products to undercut the competition. On one hand, there are certain situations in which pet owners will prefer to deal with a human being. But when you're ordering food and supplements, PetMed's business model makes a lot of sense. The prospect of ordering from the comfort of home helped push online sales to 79% of PetMed's annual revenue in its last budget year from 77% in the prior year.
And don't overlook the company's huge dividend, which I believe is fully sustainable. Given a yield of 5.1%, income-seeking investors can handily outpace a 30-year Treasury bond while also having the potential to take advantage of share price appreciation.
Finally, I'd suggest investors consider PetMed's advantageous cash position ($33.8 million) and zero debt as further reason it might be an attractive buyout target. Understand that this is pure speculation on my part, as PetMed has given no indication that it is seeking a buyer; but its current price tag of roughly $265 million, including its cash, makes the company pretty inexpensive, considering that it holds a unique piece of a steadily growing pie.
Extra, extra! Read all about it!
I hope you're sitting down for this next pick, because it's far outside of my usual realm -- yet it's consistent with my search for deeply discounted and misunderstood stocks. This week's second selection is none other than Meredith (NYSE:MDP), a female-focused media and marketing company.
Meredith has traditionally been viewed as a magazine publisher, and the thought of buying any company focused on print in an increasingly digital world is enough to give an investor indigestion. But relax: Meredith has done a fantastic job of expanding its multimedia portfolio and is seeing growth practically across the board.
In third-quarter results released in April, Meredith reported close to a 1% decline in revenue and a $0.02 decline in earnings per share from the prior-year period. However, it also delivered steady gains in retransmission revenue as network revenue and digital viewership is beginning to take off. Meredith's local media group saw revenue increase 14% to $98 million, and it just recently took ownership of a television station in St. Louis. Furthermore, Meredith generated a record 51 million unique digital visitors in the third quarter.
What makes Meredith so unique (tell me if this sounds familiar) is its niche business model. Because Meredith focuses its print and digital products on women with brands such as Better Homes and Gardens, Family Circle, and FamilyFun, it's able to focus on what women want. I'm not saying that other media companies with a dual emphasis on men and women don't know what they're doing, but Meredith's specific focus on women could give it a unique edge over its peers.
Further adding to Meredith's allure is the fact that it is income-investor friendly. On top of an existing $16 million in share repurchases authorized under a previous plan, Meredith in May announced an additional $100 million stock buyback program; this followed a 6% dividend increase in February. All told, Meredith is dishing out $1.73 per share for a hefty annual yield of nearly 4%.
With Meredith reaffirming its full-year fiscal 2014 guidance and valued at a reasonable 13 times forward earnings, I'd consider looking past the skepticism and digging deeper into this company.
No hole in this doughnut
Similar to the previous two highlighted companies, Dunkin' Brands (NASDAQ:DNKN), the company behind the famous Dunkin' Donuts and Baskin-Robbins, pointed its doughy finger at the polar vortex as the cause of its weaker first-quarter results.
The company's Dunkin' Donuts chain, which primarily features the rapidly growing categories of coffee and breakfast, saw comparable-store sales grow by just 1.2%, which was down from the 1.7% in comparable-store sales growth it reported in the first quarter of 2013. Thankfully, international and royalty revenue growth from its Baskin-Robbins chain saved Dunkin' from an earnings decline for the quarter.
Some investors took this weak report as a sign that the Dunkin' Brands growth spurt is over and that its Dunkin' Donuts business has matured into a slower-growth model. I think that couldn't be further from the truth, with the company finally ready to dip its toes into the waters of the Pacific for the first time in more than a decade.
Dunkin' Donuts did attempt to move out west in the late 1990s but found that it didn't quite understand its West Coast customer as much as it did its East Coast base. With its experience now earned, and coffee having proliferated throughout the West Coast, the region appears to be considerably more inviting. Simply having a brand-name alternative to Starbucks might prove more than enough to give its business a big boost out west. Not to mention, Dunkin' Donuts' customers are the most loyal of all coffee drinkers!
Consider also that Dunkin' Brands has allied itself with strong brands. Dunkin' in 2011 actually became the first big coffee-style chain to partner with Keurig Green Mountain (NASDAQ:GMCR), bringing its signature coffee to K-Cups. The partnership has allowed both Dunkin' Donuts and Keurig Green Mountain to expand further into consumers' homes, boosting profits and branding for both companies.
Long story short, with a long-term growth rate that could well stick between 8%-10% for the remainder of the decade and a forward P/E that has dipped down to 21, I'd suggest now could be the time to add this delicious stock to your portfolio.
Even if these 3 stocks rebound, chances are they'll struggle to keep pace with this top stock over the long run
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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 owns shares of, and recommends Starbucks. It also recommends Keurig Green Mountain. 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.