3 Stocks Near 52-Week Lows Worth Buying

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

Jul 22, 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 playing around
It's been a stellar year for most gaming sector stocks, with Microsoft and Sony introducing new gaming consoles late last year and developers benefiting from a resurgence in global growth. For investors in China-based Changyou.com (NASDAQ:CYOU), it's been a pretty miserable trailing 52 weeks, with its shares down roughly 40%.

Source: Dave Allen, Flickr.

Changyou, the developer of massively multiplayer online games, or MMOGs, delivered an epically bad first-quarter report in late April, reporting just a 2% increase in revenue to $180.8 million -- well below the double-digit top-line growth investors had become accustomed to -- and a net profit of $43 million turning into a $19.5 million loss. Much of this swing had to do with the company's decision to spend heavily on research and development, as well as its closure of select gaming accounts in Tian Long Ba Bu, one of the most popular online games in China, with no expansion pack released in the first quarter. Adding to the misery, Changyou warned that it would continue spending heavily and that it anticipates reporting a loss of $0.26-$0.38 per share in Q2. By comparison, Wall Street had been penciling in a profit of $0.08 per share three months ago!

The good news for investors is that this recent misfortune is probably not an endemic problem to Changyou's business model, and it's taking the proper measures to ensure its long-term success.

For example, the asset that I believe has the most potential for Changyou is its 17173.com website. This is a gaming portal website that's attracting millions of PC and mobile views on a monthly basis. What's important to note is that Changyou is realizing that 17173 has potential in the social media realm well beyond gaming. Changyou is focused on improving access to videos and sporting events through 17173, which could draw even more traffic and boost its pricing power with advertisers. We're already seeing evidence of this with Changyou's total monthly active accounts up 182% year over year to 239 million (due in part to 17173) and advertising revenue rising 39% year over year. 

If Changyou executes on its business expansion, which I suspect it will, investors could find a company with $152 million in net cash trading for less than 10 times forward earnings and with a top-line growth rate of between 10% and 15%. Investors should keep in mind that the gaming industry is inherently unpredictable and cyclical, but over the long run Changyou's prospects still appear to be bright.

It's a zoo out there
I'm not a big fan of betting on buyouts, as my premonitions don't often come to fruition. However, that's exactly what I'm going to do with this next selection.


Source: OakleyOriginals, Flickr.

With the U.S. economy strongly on the mend, we've witnessed a resurgence in travel both within the country and abroad. This has been a boon to online booking websites that cater to deal-seeking people like me. But, as Travelzoo (NASDAQ:TZOO) shareholders will tell you, not every online travel company is participating in the rally.

As Foolish contributor Brian Nichols astutely pointed out about two weeks ago, betting on a buyout might be Travelzoo's last remaining catalyst, with its revenue dropping on a year-over-year basis in each of the past two quarters. Just last week, Travelzoo announced that its revenue had dropped 11% to $36.9 million, with its North America segment's revenue collapsing 17% and its European revenue rising by 6%. Travelzoo is simply too small to compete against the likes of Priceline Group and Expedia, which have considerably deeper pockets and more effective brand names to garner new members.

Yet there are three specific factors working in Travelzoo's favor that could allow it to be gobbled up by a larger suitor.

First, Travelzoo's membership continues to rise, even if its revenue doesn't. According to its Q2 press release, its total number of unduplicated subscribers rose 3% to 23.7 million as North America and Europe delivered increases of 2% and 6%, respectively. Even if fewer of these subscribers are biting at Travelzoo's deals, these customers could still be worth a pretty penny to a larger suitor looking to quickly pick up 7 million European subscribers.

Secondly, Travelzoo is doing a great job of controlling costs in the wake of its revenue decline. In Q2 Travelzoo reported net income of $7.9 million, which was actually 52% higher than the $5.2 million it reported in the comparable period last year. With sales and marketing expenses down more than 20% to $15.3 million, it's clear that even if Travelzoo's top-line shrinks it'll remain healthfully profitable and could be immediately accretive to any purchasing company. 

Finally, the price is just about right. At a time when multi-billion dollar mergers are being executed with some regularity, Travelzoo's approximately $260 million price tag is a drop in the bucket for some of its larger peers and could easily be financed, perhaps even without accessing debt. Furthermore, Travelzoo is sporting $60.8 million in cash with no debt, so a buyer would really only need to fork over about $200 million to gain 23.7 million subscribers and instant EPS accretion. To me that sounds like a potential win-win and a possible reason to consider buying Travelzoo here.

Your hunt ends here
The final selection this week, Kelly Services (NASDAQ:KELYA) (NASDAQ:KELYB), comes from a sector that I typically avoid like the plague: staffing solutions.


Source: Bpsusf, Flickr.

Kelly Services has been tumbling since April, shortly before it reported its first-quarter results and clued investors into the fact that it would deliver a year-over-year decline in operating earnings as full-year revenue was forecast to rise by just 5%-7%. Ultimately this pushed the company's Q2 EPS estimates down to a fresh consensus of $0.18 from a prior projection of $0.25.

Staffing solutions companies generally walk a fine line in the jobs market, which is the reason I typically keep my distance. If the jobs market is improving and the unemployment rate is dropping, it's possible that fewer businesses could need staffing solutions as they hire more permanent and part-time employees. By a similar token, while you'd think staffing solutions companies would benefit when the unemployment rate is rising, if there are no jobs to be had, even staffing solutions providers suffer.

What intrigues me about Kelly Services here is that as the jobs market shows demonstrable signs of improvement via a lower unemployment rate, the mean duration of unemployment, while down noticeably from February, is still 33.5 weeks and roughly double what it was prior to the Great Recession. To me this signals a strong opportunity for Kelly Services to grow its top-line as there are still far too many long-term unemployed persons who want a job.

Kelly Services is also priced to be bought. With a long-term top-line growth expectation of between 4% and 6% and a modest 1.1% yield, Kelly Services brings a nice value proposition to the table at a forward P/E of just nine. With plenty of room to boost its payout and a small net cash position, I suspect there are plenty of reasons for buyers to step in here.

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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 Priceline Group and Apple. It also owns shares of Microsoft. 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.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

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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