3 Stocks Near 52-Week Lows Worth Buying

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

Jul 1, 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.

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.

Rouse Properties' targeted leasing approach. Source: Rouse Properties.

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.

Source: Nicholas Eckhart, Flickr.

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).


Source: Lumber Liquidators.

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.

These 3 stocks may have plenty of rebound potential, but the opportunity offered by this consumer device could be off the scale! 
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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 Lumber Liquidators. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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