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.
Not quite a rousing performance
You may have heard (a couple dozen times by now) that the polar vortex in the early part of the year put the kibosh on growth in a number of sectors. Exceptional cold spells brought much of the East Coast and Central U.S. to a standstill, affecting a number of sectors, including retail. One company affected negatively by the polar vortex was regional mall owner Rouse Properties (NYSE:RSE).
As Rouse noted in its latest quarter (in which it reported a narrower EPS loss), higher-than-expected costs associated with snow removal and utility costs, as well as a marginal 0.5% increase in rental rates for its smaller leased stores (under 10,000 square feet) partially held the company's results back. However, I believe that if investors focus solely on the weather, they'll miss a mall-based real-estate investment trust that's growing both organically and through acquisitions.
As Rouse also pointed out in the first quarter, its initial rental rate spread for new and renewal leases jumped by an impressive 10.2% as portfolio tenant sales increased and permanent leased percentage rose by 2.6% to 80.7%. More importantly, Rouse continues to maintain a strong relationship with its anchor stores, with its inline leased percentage finishing the quarter at 93.5%. These larger retailers are the bread-and-butter rental revenue-producers for mall-based REITs, and Rouse's growing rental rates and low vacancy percentages would signal that its core business is perfectly healthy.
Investors would also be wise not to forget that as a REIT, Rouse is required to return 90% of its profits to shareholders in the form of a dividend in order to avoid standard corporate taxation. Over the trailing 12-month period this payout has totaled an impressive 3.3% and would yield a projected 3.9% if we extrapolated out its latest $0.17 per share quarterly payout.
Finally, Rouse is doing a good job of growing its business through acquisitions. In the latest quarter it announced the acquisition of the Bel Air mall in Mobile, Ala., for $135 million. This is substantial because the inline tenant sales per square foot are actually higher than its current company-wide average, meaning it continues to seek out active shopping centers that'll give it ample rental pricing power. Following the announcement of this purchase Rouse also boosted its full-year funds from operations forecast, meaning a bigger dividend may soon be on its way for shareholders.
At roughly 10 times next year's projected FFO, Rouse shares could be quite the bargain for income-seeking investors here.
I got it at Ross
Moving from mall owner to strip mall retailer, I was surprised to find Ross Stores (NASDAQ:ROST), a perennial outperformer, treading water near a 52-week low.
Two factors have recently conspired to knock Ross Stores off its perch. First -- and stop me if you've heard this one before -- unusually cold weather reduced customer traffic in the first quarter and caused comparable-store sales to inch higher by just 1%. Total sales, which incorporate new store openings, rose 6% year-over-year. Secondly, following years of consistent earnings, Ross' slowing growth and three straight quarters of merely matching Wall Street's EPS forecasts isn't sitting well with impatient traders who've come to expect more.
Yet, I would contend that Ross' maturation into a steady growth business isn't cause for punishment by shareholders. Instead, it's a reason to be jubilant.
Ross has a number of advantages that its mall-based peers simply can't compete with. Namely, Ross is able to bring consumers brand-name merchandise for a reasonable price. Regardless of how the U.S. economy is performing, a good chunk of consumers still care about how they look and would prefer to buy affordable luxury items. Ross' ability to purchase brand-name items later in the season, or that were simply overproduced or overbought, at a significant discount, is an incredibly strong lure to bring in both new and return customers.
I know what you might be thinking, and the answer is no -- the fact that Ross uses discounting as a lure to bring consumers into its stores doesn't mean its margins are being hurt. The reason Ross is able to maintain its margins relates to a combination of tight cost controls and its ability to wait for the right merchandising deals. Ultimately, this speaks to the strong and experienced management team at the helm of Ross.
With Ross valued at 14 times forward earnings and paying a modest but growing dividend, now may be the time to toss this stock into your shopping cart.
How much wood would you chuck?
Just to make it a perfect polar vortex trifecta, the last company I'm examining this week that could have significant rebound potential is Lumber Liquidators (NYSE:LL).
Unsurprisingly, a company responsible for many a home makeover didn't fare well in the first-quarter as consumers across most of the company were holed up in their homes due to bad weather. As Lumber Liquidators reported in late April, it delivered a net sales increase of 6.9% due to the opening of new locations, but saw comparable-store sales dip by 0.6% in locations open at least a year. In addition, net income of $13.7 million, or $0.49 per share, fell $0.13 shy of Wall Street's expectations.
Another fear factor here is the potential that a rise in lending rates would crush consumers' drive to improve their homes. The Federal Reserve has been extremely accommodative of consumer needs for the past half-decade, but a strengthening U.S. economy may lead to an interest rate rise as soon as next year. If this happens, the entire housing sector, as well as suppliers to the sector, could swoon.
However, keep in mind that we're only a year-and-a-half removed from anointing Lumber Liquidators CEO Robert Lynch as the CEO of the Year.
Lynch's three-point plan has been imperative to Lumber Liquidators' success. First, Lynch pushed for a larger marketing focus on contractors and homeowners that planned to hire a contractor. Second, Lynch purchased Sequoia Floorings which eliminated the middleman and established a direct-to-mill relationship with its supplier in order to reduce costs. Finally, Lynch chose to emphasize the cost savings and value that has made Lumber Liquidators so successful in the past.
Between Nov. 2011 and Nov. 2013, Lumber Liquidators' shares rose about 700%, so a pullback wasn't out the question. But, with shares now down more than a third from their all-time high, it's not as if Lynch's plan just isn't working anymore. Investors and Lumber Liquidators were simply blindsided by bad weather and high expectations.
In addition, even if lending rates rise, flooring specialists like Lumber Liquidators could still benefit as people get "stuck" in their current home and turn to remodeling to freshen up their interior. With the company reaffirming its full-year EPS forecast of $3.25-$3.60, despite its EPS miss, I'm feeling confident that this is merely a short-term swoon for this recognizably well-run company.
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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.
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