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.
One industry that's been beaten to a pulp over the past year and change are solar panel manufacturers. In particular, the flagship company among solar manufacturers, First Solar (NASDAQ:FSLR), is down more than 50% from its 52-week high.
Two big issues are plaguing solar stocks, and they may not abate before the year is over. First, the price for oil and natural gas have tumbled over the past two years, reducing the urgency for businesses, consumers, and governments to switch to alternative energy sources.
The other issue has been the tightrope some of First Solar's peers have walked as growth for solar products has slowed. In April, SunEdison filed for Chapter 11 bankruptcy protection, while numerous other solar-based businesses up and down the supply side channel have been dealing with relatively high debt levels that have constrained any plans for expansion. This has left companies like First Solar with lukewarm demand and somewhat lumpy revenue recognition from its projects.
What makes First Solar so attractive are its balance sheet and ability to grow even during a period of consolidation. First Solar ended the second quarter with $1.67 billion in cash and cash equivalents compared to just $273 million in debt. In other words, about 39% of First Solar's valuation as of Wednesday's closing price was comprised solely of its net cash. Having this much cash on hand gives First Solar a lot of flexibility that could come in handy if its peers are looking to offload assets for below-market rates.
More importantly, the company has 1.4 GW of bookings year-to-date and it maintained its full-year forecast calling for 2.9 GW to 3 GW of shipments in 2016 in spite of weakness within the industry. Management also raised potential booking opportunities up to 24 GW, presumably meaning that First Solar has the opportunity to still snag some hefty orders. Additionally, given First Solar's healthy balance sheet, it may be able to win orders simply on account of its financial stability.
Currently valued at just 16 times next year's EPS and trading at only 62% of its book value (largely because of its monstrous cash pile), First Solar could be a shining light among value stocks for your portfolio.
Black gold. Texas tea.
Next up, I'd suggest value investors give offshore driller Noble Corporation (NYSE:NE) a much closer look.
It's no secret why offshore drillers have been beaten down: weaker energy prices. Crude oil dipped by more than 75% at one point from its 2014 high, causing integrated oil and gas companies to reduce the number of new contracts they sign, or in some cases cancel contracts altogether for a fee. Matters have been even tougher for offshore drillers like Noble because offshore drilling is costlier than land-based drilling.
However, the future still looks bright for this driller of black gold and Texas tea. For starters, Noble is a lot like First Solar in that it has one of the best balance sheets in the industry. With its capital expenditures reduced from an average of $1.8 billion between 2011 and 2014 to perhaps less than $300 million by 2017, Noble has been working to reduce its debt and renegotiate its terms to give the company as much financial flexibility as possible. Noble has $752 million in debt due between 2017 and 2019, but half of its $4.2 billion in aggregate debt isn't even due until 2025 or later. Furthermore, it remains cash flow positive even in the face of weaker demand thanks to steadily falling drilling rig costs.
Noble also has the advantage of having one of the youngest fleets in the world. The average age of its fleet is 10 years, placing it well below rivals such as Ensco, Transocean, and Diamond Offshore, whose fleets average 18, 18, and 27 years in age, respectively. Newer rigs are more production efficient, less likely to sit idle, and more likely to command top dayrates.
Though Noble is expected to lose money in 2017, I'd still quantify it as a value stock since it's trading at less than four times its expected free cash flow in 2017. With its valuation having sunk to just 18% of its book value, now could be the time to dig a bit deeper into Noble.
A healthy dose of value stock
Finally, value stock investors would be wise to not give up on organic and natural food supermarket Whole Foods Market (NASDAQ: WFM), whose shares touched their lowest level since early 2011 this week.
What's wrong with Whole Foods Market? The big issue seems to be increasing competition within the organic food space and relatively tame U.S. wage growth, which is constraining consumer purchases. The rapid growth of Sprouts Farmers Market and Trader Joe's, along with national supermarkets pushing into organic offerings, have pressured Whole Foods' margins and put it on the defensive.
However, Whole Foods is far from being a leftover. It can still be the main course in the organic-food supermarket space if some of its key initiatives find their mark. Front-and-center are the company's new 365 stores, which are designed to appeal to a more cost-conscious consumer. Whole Foods' new 365 concept features smaller stores, less in the way of aesthetics (giving the stores a slightly more industrial feel), member rewards designed to build customer loyalty, and cost-saving initiatives, such as putting dairy and meats under closed glass doors to keep cool air from escaping. These subtle changes could allow Whole Foods to capture a brand new type of customer looking for healthy food options.
Whole Foods should also be able to offer differentiation from its competitors through digital initiatives and internal store updates. Whole Foods is putting more emphasis back on the shopping experience itself, which means remodeling or updating about 70% of its stores that are older than 10 years. Furthermore, with a growing online presence and a push into home delivery, Whole Foods is pushing the boundaries of organic convenience.
Being valued at 18 times its forward earnings might not seem like a big discount compared to the two companies discussed above. But considering the power of the Whole Foods brand and the expected growth of organic food demand over the next decade, Whole Foods looks to be every bit a value stock at this point.
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.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. The Motley Fool owns shares of and recommends Whole Foods Market. 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.
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