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.
Pay to play
We'll begin the week by taking a look at a company that's been absolutely thrashed in June following its second-quarter earnings results: VeriFone Systems (NYSE:PAY).
VeriFone Systems is the company responsible for making credit card reading devices, including the next-generated devices that a number of merchants are now using to read embedded information chips in credit cards. These chips have been in place in Europe for a while, but they became commonplace in the U.S. only recently. VeriFone also supplies contactless and near-field communication-reading devices.
During the second quarter, VeriFone reported adjusted revenue of $532 million, an 8.6% improvement from the prior-year period, and $0.47 in adjusted EPS. The problem is that VeriFone missed its own prior profit guidance of $0.51-$0.52 per share for Q2. Furthermore, it lowered its full-year sales guidance to a range of $2.15 billion to $2.17 billion, which is $65 million lower at the midpoint from its prior projections. VeriFone blamed the slow machine verification process for retailers -- payment processors need to verify the new chip readers before merchants can use them -- as well as direct competition from alternative-payment processors such as Square among smaller businesses, for its weaker guidance.
While it's possible VeriFone's woes extend beyond just a single quarter, I can see long-term value to be had here for investors, with its shares down 30% over the trailing month.
For starters, VeriFone's chip readers dominate the merchant landscape. A delay in getting its readers verified is annoying for investors, but it's not a long-term game-changer. Presumably within a few months to a year it'll have a solid base of new machines in use, and whatever weakness it experienced in Q2 will be a thing of the past.
VeriFone also has levers it can pull to cut costs. In its Q2 press release, VeriFone alluded to a restructuring that'll help it reduce costs and focus its efforts on only its most profitable businesses. Layoffs could help it tighten its belt enough to withstand this minor hiccup in growth until its next-generation payment platforms are where they need to be. Current plans are to reduce headcount enough to save $30 million annually.
There's also the expectation that transaction volume and dollars processed by credit card readers is set to grow over time. This development would bode well for VeriFone's long-term investment thesis. With the stock valued at just 10 times this year's profit forecast and less than 9 times fiscal 2017's, it could be worthwhile one for value investors to consider.
A value stock that can fly
Next, I'd encourage value stock investors to turn their attention to national airline JetBlue Airways (NASDAQ:JBLU), whose shares have dipped to a fresh 52-week low.
Generally speaking, airlines have really had things good for years now. The Federal Reserve has kept lending rates near historic lows, which is great news, since airplanes aren't getting cheaper, and most airlines dip into debt to finance new plane purchases. Jet fuel prices have also fallen substantially in recent history, with crude oil touching its lowest levels in 12 years earlier this year. However, jet fuel prices have been precipitously rising since about February, with crude oil returning back to $50 a barrel, and load factor has tapered off as U.S. GDP growth slows. This situation has left airlines such as JetBlue contemplating their next move and, in many cases, lowering capacity expansion forecasts.
Although things may no longer be ideal for airlines, I believe there's enough that could go JetBlue's way over the long term to suggest that value investors give this company a closer look.
One of the more intriguing reasons to own JetBlue is that its fleet, which totals approximately 218 planes, is an average of 8.7 years old. That's generally lower than what you'll find from larger airlines. Newer planes are often more fuel-efficient, resulting in lower jet fuel costs; they have more amenities, which tends to keep passenger satisfaction up; and they're less likely to need unexpected maintenance, meaning more revenue generated from planes in the skies.
Second, JetBlue offers a balance sheet investors can trust. As noted, airlines often use debt to finance new plane purchases. Doing so has caused many of the major airlines to carry billions of dollars in net debt. JetBlue, on the other hand, has just $490 million in net debt and a manageable debt-to-equity of 52%. Further, it was able to generate $1.66 billion in operating cash flow over the trailing-12-month period, meaning it can predominantly rely on its cash flow for capacity expansion.
But even more so, JetBlue is regularly among the top carriers in terms of overall flying experience. From check-in to in-cabin service and amenities, you'll regularly find JetBlue right around the top spot on the numerous annual surveys that come out. WalletHub's "2016 Best & Worst Airlines" report ranked JetBlue as the second-best airline, behind only Virgin America. These rankings demonstrate that customer loyalty to JetBlue is amazingly strong.
Currently valued at only 7 times forward earnings, JetBlue could be quite the bargain.
A "rare" value gem
Last, we'll turn our attention to the beaten-up healthcare sector and examine why rare-disease drugmaker Alexion Pharmaceuticals (NASDAQ:ALXN) could be more of a value stock than you realize.
Alexion Pharmaceuticals is best known for Soliris, a Food and Drug Administration-approved enzyme replacement therapy that treats paroxysmal nocturnal hemoglobinuria and atypical hemolytic uremic syndrome. It's also the second most expensive drug in the world, with annual treatment costs often above $500,000.
The reason Alexion's share price has been pummeled lately ties into its June 6 announcement that its phase 3 REGAIN study of Soliris in patients with refractory generalized myasthenia gravis -- a disease characterized by muscle weakness, shortness of breath, and episodes of respiratory failure -- failed to meet statistical significance. While not expected to be a huge revenue maker, it would have expanded Soliris' label once more and really allowed Alexion to pile on the profits. Nonetheless, this latest drop has created what looks to be an attractive entry point for value investors.
Keep in mind that Alexion has the two things that every drugmaker strives for: pricing power and a veritable monopoly. Alexion focuses on ultra-rare diseases, meaning it'll have little, if any, major competitors if it reaches pharmacy shelves. Additionally, because there's rarely ever any competition, yet the drug development process is still expensive, it has the opportunity to pass along six-digit annual costs on its drugs to insurers. Assuming the U.S. government fails to pass any sort of prescription-drug reforms, Alexion's pricing power should remain top-notch.
Alexion has also been able to use its cash flow to grow organically and expand its product line beyond just Soliris. In June 2015, Alexion completed an $8.4 billion cash and stock acquisition of Synageva BioPharma, which gave it access to what became known as Kanuma, a treatment for patients with lysosomal acid lipase deficiency. At its peak, Kanuma is projected to sell more than $1 billion per year. Alexion also acquired Synageva's developing rare-disease pipeline, which helped boost its clinical program to nine ongoing clinical studies (not counting REGAIN), and a handful of preclinical studies.
Now trading at 18 times forward earnings but boasting a PEG ratio of 1.2, Alexion looks to be an attractive value stock worth considering.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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