While many companies' shares are rising past their fair values now, others are trading at potentially bargain prices. The difficulty with bargain shopping, though, is that you may be understandably hesitant to buy stocks wallowing near their 52-week lows. In an effort to separate the rebound candidates from the laggards, it makes sense to start by determining whether the market has overreacted to a company's bad news.
Here's a look at three fallen angels trading near their 52-week lows that could be worth buying.
Black gold, Texas tea
We'll begin the week by looking at an industry where 52-week lows have been a very common occurrence over the past year, oil and gas, and examine why refiner HollyFrontier (HFC) should be front-and-center on your radar if you're a value investor.
The thesis for HollyFrontier's struggles is no secret: oil prices have plunged, meaning investors anticipate that every oil and gas company from upstream to downstream operations will be clobbered. To some extent this thesis has been correct, with high levels of debt dragging down drillers, as well as suspect refiners and midstream operations. However, HollyFrontier is a completely different animal that looks to be in much better shape than its peers.
For starters, you'll note that HollyFrontier was able to expand its refining capacity organically over the past five years using the positive cash flow from its operations rather than relying on debtor financing. Doing so has left the company with only $1.3 billion in debt ($1.2 billion in net debt), for a total debt-to-equity of 23%. This flexibility gives HollyFrontier far more breathing room than its peers and allows it to easily alter its refining capacity if underlying commodity prices usher in a big change.
Image source: HollyFrontier.
Another key growth driver for HollyFrontier is its midstream subsidiary Holly Energy Partners (HEP), which is benefiting from its prime geographic location in in the Central, South-Central, and Southwestern United States. Because midstream contracts are often inked for the long term, Holly Energy Partners has been able to count on relatively predictable cash flow on a quarter-to-quarter basis. It also helps Holly Energy Partners, and its parent HollyFrontier, avoid exposure to wholesale cost fluctuations.
Lastly, supply and demand are working in HollyFrontier's favor, even if crack spreads for refiners have dropped on a year-over-year basis as businesses and consumers adjust to a lower-priced crude market. With crude prices not expected to quickly rebound from their lows, this could mean higher demand for petroleum based products, including gasoline and diesel fuel, at the pump. HollyFrontier can make up in volume what it's lost in crack spreads with ease if low crude prices are indeed here to stay.
Valued at just eight times forward earnings and paying out a huge 4.7% dividend yield, value stock investors would be wise to check out HollyFrontier.
Keep on trucking
Next, I'd opine that investors looking for a cheap logistics company pay attention to small-cap freight and logistics company ArcBest (ARCB 1.31%).
Image source: ArcBest.
ArcBest currently finds itself at a fresh 52-week low on account of weakness in its first-quarter results. The trucking company reported an adjusted loss of $0.23 per share, which was driven higher by a $0.07 charge in self-insurance expenses at ABF Freight, as well as a "sluggish and inconsistent industrial and manufacturing economic environment." ArcBest also struggled with lower diesel prices. Falling diesel prices do help reduce fuel costs for its fleet, but it also removes the highly profitable fuel surcharges that it passes along to its customers.
In spite of these challenges, it could be time to consider loading up on ArcBest.
One of the main reasons it appears to be such an attractive company are its inorganic growth opportunities. In 2012, ArcBest (known then as Arkansas Best) acquired Panther Expedited Services for $180 million, giving ArcBest access to the non-asset expedited services industry which it didn't have a presence in at the time. More recently, it announced the $26 million buyout of Bear Transportation Services to boost its asset-light business through ABF Logistics. These transactions boost ArcBest's customer base and often provide earnings accretion within the first couple of quarters.
Image source: ArcBest.
Secondly, buying into the trucking sector means you're making a bet on the long-term growth of the U.S. economy, which historically has been a good bet. There's not much ArcBest can do when the industrial and manufacturing components of the U.S. economy weaken. However, as we've seen historically, the U.S. economy spends far more days expanding than it does in recession or contracting. This would mean that investors who buy solid logistic companies like ArcBest during downturns should be rewarded during long-tail periods of economic expansion. And with less than $1 million in net debt and a debt-to-equity ratio of just 36%, ArcBest's balance sheet is of little concern to investors.
ArcBest also hashed out a fresh five-year labor agreement with its Teamsters labor union in June 2013 that was critical in helping the company lower its costs and ensure ongoing expansion. This means ArcBest has another two years of low labor costs still to come before it'll head back to the bargaining table with union workers.
Trading at just nine times forward earnings, and also boasting a 2% yield, ArcBest could bring some serious horsepower to your portfolio.
Bank on this stock over the long term
One final value stock to add to the watchlist this week is regional retail and commercial banking company New York Community Bancorp (NYCB), which operates in New York, New Jersey, Ohio, Florida, and Arizona.
The story for New York Community Bancorp is the same story you'll find at hundreds of banks across the country: slow U.S. economic growth and low lending rates are constraining growth opportunities. Reduced U.S. GDP growth has caused the Federal Reserve to hold off on its proposed pattern of interest rate hikes, which is disappointing since net interest margins for banks would expand if rates rose. However, this is but a small speed bump in the road for New York Community Bancorp.
The important factors that investors should be focused on are New York Community's bread-and-butter banking activities, and its credit quality. During the first quarter, deposits rose $556 million to $29 billion, and loan origination spiked higher by more than $3 billion. Furthermore, non-performing non-covered assets totaled just 0.14%, or $64.6 million, of total non-covered loans as of the end of the first quarter. In terms of credit quality, it'd be tough to find a regional bank in better shape.
Buying into New York Community Bancorp is also a play on the normalization of lending rates at some point in the future. It seems unreasonable to expect lending rates to remain as low as they are for the long term when historical rates are many percentage points higher. Although we don't know with any certainty when lending rates could begin rising again, it would seem to suggest that net interest margin has a much better shot of expanding than contracting further at this point. In other words, bigger profits could be around the corner for New York Community Bancorp.
Value investors should also like this banks' healthy shareholder return policy. New York Community Bancorp is currently in the process of merging with Astoria Financial (AF), and in the process catapulting itself above the $50 billion in assets threshold that defines a "systemically important financial institution." Being in this category means higher costs and distribution regulations, which caused New York Community to recently lower its quarterly payout to $0.17 per share from $0.25. Nonetheless, this new payout still equates to a 4.6% yield, and the addition of Astoria Financial gives New York Community broader access to consumers in the Northeast.
At just 12 times forward earnings, New York Community Bancorp could be ripe for the picking by value investors.
