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3 Value Stocks Near 52-Week Lows Worth Buying

By Sean Williams – Oct 13, 2016 at 11:02AM

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These three value stocks may be down, but they're far from out.

Image source: Getty Images.

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.

Down, but not out

Traditionally, drugmaker Bristol-Myers Squibb (BMY 0.19%) has been valued at a relatively aggressive premium compared to its peers. That premium has been wiped away recently as a result of the top-line and final results from the CheckMate-026 study.

CheckMate-026 was a phase 3 trial examining Bristol-Myers' lead cancer immunotherapy product, Opdivo, as a monotherapy treatment in first-line non-small-cell lung cancer patients (NSCLC) whose tumors had 5% or greater PD-L1 expression. The primary results demonstrated a progression-free survival figure that actually favored the chemotherapy placebo, with a median overall survival of 14.4 months for Opdivo and 13.2 months for the placebo. All told, Opdivo failed miserably in first-line NSCLC.

Meanwhile, Opdivo's primary competition, Merck's (MRK -1.31%) Keytruda, breezed through with flying colors in its phase 3 KEYNOTE-024 study in first-line NSCLC patients with 50% or higher PD-L1 expression. Keytruda lowered the risk of disease progression or death by 50%, and progression-free survival improved to 10.3 months, compared with six months for the placebo. Long story short, Opdivo's failure has lopped off about a third of Bristol-Myers' valuation over the past two months.

Image source: Bristol-Myers Squibb.

However, this weakness could be an intriguing buying opportunity. It's important to point out that while Opdivo did fail, the trials weren't a complete apples-to-apples comparison. Opdivo was targeting much lower PD-L1 expression, whereas Keytruda aimed at higher expression. Also, Opdivo was examined as a monotherapy when most cancer immunotherapies have demonstrated better efficacy when paired with an existing chemotherapy.

The bigger point is that even if first-line NSCLC isn't in Opdivo's future, it'll remain a standard-of-care therapy in second-line NSCLC and second-line renal cell carcinoma for the time being. There are also numerous ongoing clinical combination studies that could bear fruit for Opdivo. In other words, Opdivo could still very easily top $5 billion to $7 billion in peak annual sales.

Bristol-Myers Squibb is also counting on the continued growth of oral anticoagulant Eliquis, which was co-developed with Pfizer. Eliquis is already on pace for more than $3 billion in sales this year, and label expansion opportunities could allow it to potentially double its sales by 2020.

Sporting a PEG ratio that's now right around 1, Bristol-Myers Squibb's stock looks like a bargain.

A little insurance for value investors

For our next value stock we're going to stick with the healthcare industry by taking a closer look at health-benefits giant CIGNA (CI).

The biggest issue for CIGNA in recent quarters has been the Affordable Care Act, or as it's more commonly known, Obamacare. Before its launch on Jan. 1, 2014, the Congressional Budget Office had predicted that around 21 million people would be newly enrolled by the end of 2016. However, those estimates proved lofty, with 11.1 million enrolled and paying members as of the end of the first quarter of 2016.

What's more, the majority of enrollees proved to be sicker and costlier than expected. Considering that there were millions of people who'd been shut out of the healthcare system prior to Obamacare because of pre-existing conditions, the passage and implementation of Obamacare allowed these individuals the right to get health insurance. Thus, medical expenses for insurers have been considerably higher than expected.

Image source: Getty Images.

Now for the good news: CIGNA has decided to buck the trend of its peers and expand its offerings in a few states. Losses for UnitedHealth Group, Aetna, and Humana, pushed all three to significantly cut back on their coverage in 2017. CIGNA sees this reduction in coverage as an opportunity. Considering that health-benefit providers still have substantial pricing power, it could work out in CIGNA's favor.

Investors should also understand that CIGNA gets a considerably smaller amount of its revenue from Obamacare. CIGNA is predominantly a commercial insurance company, which means the employer mandate should only further help its pricing power. The employer mandate is the actionable component of Obamacare that requires large employers to ensure coverage options are available to full-time equivalent employees. Between its commercial accounts and Medicare Part D business, CIGNA isn't exactly hurting for future growth opportunities.

Valued at just 13 times forward earnings, CIGNA could be worth a deeper dive.

Home is where the value investment is

Finally, value investors may want to give home products retailer Williams-Sonoma (WSM -0.25%) a closer look following its recent swoon.

The reason Williams-Sonoma has struggled recently can be traced to earnings-based weakness. During the second quarter, Williams-Sonoma reported EPS of $0.58, meeting expectations, but also delivered an operating margin that dipped 20 basis points year over year to 7.2%. Further, the company trimmed its full-year growth outlook on the heels of softer retail spending. For the full year, comparable brand growth is slated to grow by only 1% to 4%.

Image source: Flickr user Tezzca. 

Though it was far from a banner quarter for Williams-Sonoma, there are silver linings that long-term investors can latch onto. For example, among brick-and-mortar retailers you'll struggle to find any with a larger e-commerce presence than Williams-Sonoma. E-commerce net revenue grew by 5.2% during the second quarter and totaled $600 million. This works out to 51.7% of total revenue during Q2 2016, up from 50.6% in Q2 2015. With over half of its sales coming from e-commerce, Williams-Sonoma is able to reduce its overhead costs and have more efficient control over its supply chain and inventory turnover.

There's also a lot to like in terms of internal investments in remodeling and marketing. During the second quarter, there were noted improvements in sales in stores that were recently remodeled. Also, investments in targeted marketing campaigns are paying off. With a focus on attracting consumer on social media, and driving those interactions more effectively and profitability, Williams-Sonoma is able to form an emotional attachment with the consumer that keeps them loyal to the brand. Perhaps no Williams-Sonoma-owned brand has done this better than West Elm, a provider of home furnishing, where comparable-brand sales growth tallied nearly 16% year over year.

A forward P/E of 13, along with a 3% dividend yield and $500 million share buyback program, provide all the inspiration value stock investors may need.

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.

The Motley Fool recommends UnitedHealth Group and Williams-Sonoma. 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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