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.
Flip the switch
Electric utilities have been among the biggest laggards during the multiyear stock market rally. Utilities are often viewed by investors as defensive investments, so when the market is roaring higher and companies are growing at a breakneck pace, it's difficult to keep investors happily situated in these slower-growth companies. However, once in a while one stands out as particularly attractive, regardless of the strength or weakness of the market or U.S. economy. That's why today's first bottom-fishing selection is Hawaiian Electric Industries (NYSE:HE), or HEI.
HEI has been held back by two primary obstacles. First, as I just mentioned, the electric utility industry is mostly regulated, and this implies that HEI is reliant on Hawaii's energy regulators to approve rate increases. If HEI doesn't get these increases approved, then its growth rate tends to be minimal. In April, the Hawaii Public Utilities Commission suggested it wouldn't be inclined to allow rate increases until the state's electric utilities show serious efforts to implement solar technologies in order to lower consumer costs.
Secondly, HEI is very reliant on the Hawaiian economy -- and the Hawaiian economy is in turn very much dependent on tourism. Although weak economies don't make for a perfect correlation for companies like HEI, which provide a basic need like electricity, if fewer tourists are visiting Hawaii it's possible that businesses and consumer could look to reduce their expenditures, including electricity usage.
But there are more good reasons to consider HEI a buy than there are reasons to avoid it.
For instance, HEI holds a veritable monopoly in Hawaii on electricity generation. While it still needs the approval of Hawaii's PUC for rate increases, its sheer size creates a barrier to entry that makes it practically impossible for any other utility to pick up customers or garner market share. Because electricity is an essential need of homeowners, HEI can deliver mostly predictable cash flow and profits on a quarter-to-quarter basis.
Despite the PUC's insistence that HEI incorporate more solar into its electric grid, I'd point out that HEI has been a pioneer in using new alternative-energy technology. HEI derives 120 MW of electric generation from biofuels at Campbell Industrial Park, has access to a number of available wind power sources, converts waste to energy, has solar grids, and generates electricity using hydroelectric power. This wide array of alternative energy investment should help lower its costs, and those of its customers, over time.
Finally, HEI is a premier dividend stock. The company has boosted its payout for nearly two decades, and the yield of roughly 5% could double an investors' initial investment in less than 15 years. If you're a risk-averse investors looking for solid income, you would be wise to give HEI a closer look.
A budding super-STAAR
For more risk-taking investors, this next selection could be right up your alley. I tend to avoid companies that are currently losing money, but I would throw that thesis out the window when it comes to STAAR Surgical (NASDAQ:STAA), a company that makes implantable lens products and delivery devices for the eye.
The big knock against STAAR Surgical is the company's lack of profitability. While a number of eye drug and product peers are delivering profits to investors, STAAR Surgical shareholders have watched their company fall short of estimates in five straight quarters and nine of the past 10! That's certainly enough of a reason to scare off skittish investors.
In addition, STAAR is reeling from a warning letter issued by the Food and Drug Administration early last month with regard to production at its Monrovia facility. Concerns that the company is currently addressing include the shelf life of its Visian implantable collamer lens (ICL) product and design control documentation.
Yet I suspect that STAAR is about ready to turn the corner. I also believe that the reason the company continues to fall short of Wall Street's expectations has nothing to do with poor company performance, but rather with a lack of adequate analyst coverage. It's difficult to call a company's profit or loss a "miss' when the estimate only includes one analyst.
Perhaps the greatest factor working in STAAR's favor is an aging global population. As an alternative to LASIK corrective surgery, STAAR's ICL offers patients an equally quick sight solution. In the second quarter STAAR announced that its Visian ICL revenue grew 8% globally, with prices rising 3% and procedure volume increasing by 5%. The U.S. is likely to be a large target audience over the coming two decades thanks to a retiring baby boomer population, but growing middle-class wealth in emerging-market countries, coupled with improving life expectancies, means STAAR's ICLs could play a crucial role in improving the eyesight of millions of people. In Europe, the Middle East, and Africa, for example, sales of its ICLs jumped 22%, demonstrating just how important emerging markets will prove to be for STAAR in addition to strongholds in the U.S.
More importantly, STAAR should be ready to turn the corner to substantial profitability in 2015. Its forward P/E of more than 25 might look unreasonable, but an expected growth rate ranging between 10% and 15% over the coming years should quickly wash away fears of overvaluation. If STAAR can hit its long-term growth targets and push into emerging markets without losing its pricing power, there's no reason to believe its share price can't head higher over the long run.
The building blocks of a strong investment
Lastly, I would encourage value-seeking investors to embrace toy maker Mattel (NASDAQ:MAT) after what can only be described as a dismal second-quarter report.
For the second quarter, Mattel reported that global gross sales of Barbie fell 15%, while sales of Hot Wheels dipped 2% and Fisher-Price slumped 17%. All told, gross margin tumbled nearly 5 percentage points, and the company earned just $0.08 per share compared to $0.21 in the year-ago period. This marked the third consecutive EPS miss for Mattel and its fourth in the past five quarters. It also signaled the continued deterioration in some of Mattel's core brands, such as Barbie.
Despite this weakness, I'd remind investors that it's always darkest before dawn. This isn't to say that Barbie will make a miraculous comeback, but there are plenty of factors for value-seeking investors to love.
To begin with, consider the value inherent in the brands that Mattel possesses within its product portfolio. Barbie, Hot Wheels, Fisher-Price, and many others are all multi-generational products that tend to advertise for themselves. They're also products that today's parents often have an emotional attachment with, which creates a loyalty factor that's often difficult to build in the toy industry.
Also consider that Mattel isn't sitting idly by as its core brands struggle. A big chunk of Mattel's margin deterioration relates to the short-term costs of acquiring MEGA Brands, which manufactures building blocks similar to LEGO's. However, MEGA also brings with it a laundry list of licensed brands that allow Mattel to broaden its partnerships with existing entertainment partners and push Mattel beyond being just a cyclical toy company.
Finally, remember that Mattel does an excellent job of putting its shareholders first. The past couple of quarters have been a bit unkind to investors, but Mattel has done what it can to reduce its internal costs, to repurchase its own shares in order to boost EPS, and to continue to deliver impressive dividend growth. It's hard to believe Mattel returned just $0.05 annually to investors in 2002 and now pays $1.52 annually -- nearly a 4% yield.
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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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