While many companies' shares are rising past their fair values right 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.
This specialty drug distributor could pack a value (and growth) punch
Topping the list of intriguing value stock candidates this week is specialty drug distributor Diplomat Pharmacy (NYSE:DPLO), which was raked over the coals last week after reporting disappointing third-quarter results.
For the quarter, Diplomat Pharmacy announced revenue of $1.18 billion, a 25% increase from the prior-year period, though organic and dispensed prescription growth came in at a tamer 12% and 9%, respectively. Net income wound up dropping by nearly 50% to $5.4 million or $0.08 per share. Both figures wound up falling well short of Wall Street's consensus, and not surprisingly Diplomat also lowered its full-year forecast.
A big component of the disappointment was weakness in the hepatitis C pricing market. Larger gross-to-net discounting has reduced margins for both the drugmakers and distributors. On the other hand, other aspects of Diplomat's specialty distribution business grew quite nicely. For example, revenue generated from oncology grew 57% inclusive of acquisitions and 36% on an organic basis. Considering the immense dollar sum being thrown at oncology, rare disease, and other specialty therapeutics, the adverse effect from hepatitis C pricing probably isn't a long-term concern.
Mergers and acquisitions are another clear avenue of growth for Diplomat Pharmacy. Earlier this year Diplomat purchased TNH Advanced Specialty Pharmacy. TNH specializes in oncology drug distribution, and it gives Diplomat a presence in the California and Texas markets. In February 2015, Diplomat gobbled up BioRx for $315 million in a cash-and-stock deal. BioRx's specialty relates to infusion services for ultra-rare, rare, and chronic diseases. With healthy cash flow from operations ($31.4 million in Q3), Diplomat should have enough in the tank to continue to make bolt-on acquisitions as it sees fit.
Given that specialty drugmakers have a laundry list of pricing advantages, and taking into account Congress's history of sweeping drug reform discussions under the rug, Diplomat's business model appears quite attractive over the long run. Currently value at 15 times forward earnings, but sporting a sub-one PEG, which signifies its exceptionally fast growth rate, Diplomat Pharmacy is worth a closer look by both value and growth investors.
The sun is shining on this opportunity
Consider this one of those rare double-down considerations. It wasn't long ago that I suggested to value investors that solar panel manufacturer First Solar (NASDAQ:FSLR) could be worth a look. Shares of the company rebounded modestly since that suggestion, but like Diplomat the company was taken to the woodshed after releasing its quarterly earnings report.
In the third quarter, First Solar witnessed its net sales decline to $688 million from $1.27 billion in the prior-year period as a number of key projects wound down. On an adjusted basis, when factoring in restructuring charges and a foreign tax benefit, the company earned $1.22 per share in Q3, which trounced Wall Street's expectations. Unfortunately, the company also shaved $1 billion off of its GAAP revenue guidance for 2016. With solar panel pricing down by double-digits, and revenue from the California Flats and Moapa projects now being recognized in 2017, not 2016, First Solar made the move to adjust its top-line guidance. Wall Street was none too pleased.
Nonetheless, there are reasons to believe that this best of breed solar company could be worth owning for the long-term. For starters, it has arguably the best balance sheet within the industry. Whereas most solar companies are mired in debt, First Solar is expected to have between $1.4 billion and $1.5 billion in net cash by year's end. This essentially means that as much as $1.5 billion of its $3.5 billion valuation is entirely comprised of cash. It also means that if First Solar sees an attractive product or company within the rapidly consolidating industry, it has the finances to acquire it.
Longer-term, First Solar's business model appears destined for success. Developed countries around the world are pushing initiatives and credits for businesses and individuals who switch to alternative energy platforms, of which solar is probably the most practical. Yes, lower pricing can hurt First Solar's margins, but it could also help improve the company's backlog by making projects all the more affordable.
Assuming First Solar can continue to improve the efficiency of its panels and retain its superior balance sheet, then its current valuation at approximately 60% of book value could be too enticing to pass up.
The cure for value investors' ills
Lastly, value stock investors may want to give national hospital operator Tenet Healthcare (NYSE:THC) a closer examination.
As you may have rightly surmised, Tenet, like the rest of this week's value stocks, recently plummeted after reporting its quarterly results. During the third quarter, Tenet recorded a $9 million net loss from continuing operations, which was about half of what it lost in Q3 2015, while net operating revenue dipped about 0.4% to $4.16 billion. After adjusting for certain items, Tenet earned $0.16 per share, which was $0.02 below what Wall Street was expecting. The company's profit guidance for the fourth quarter was also well below the consensus.
As with the other value stocks above, investors can't be faulted for feeling disappointed. However, as we've seen with the other two companies, there's a long-term growth story that can't be overlooked. During its "bad" quarter, Tenet also announced a drop in its doubtful accounts revenue to $367 million, or 7% of total revenue, from $371 million, or 7.3% of total revenue in the year-ago period. This means more people that are walking through its doors are insured, which in turn should mean that Tenet has more operating cash flow to work with in the coming years that it can use to either differentiate its hospitals from those of its peers or use for M&A purposes.
Short-sighted investors may have also overlooked the fact that same-hospital revenue grew 5.3% year-over-year, with same-hospital exchange admissions rising 16.9% during Q3 from the prior-year period, and same-hospital exchange outpatient visits rocketing 32% higher. The data suggests that as the uninsured rate falls, consumers are feeling more comfortable heading to hospitals or specialty care facilities for medical care.
With health insurance remaining a critical issue during this election cycle, it's likely that Tenet will continue to benefit from steadily falling uninsured rates. Now sporting a forward P/E of less than nine, Tenet Healthcare could be an attractive addition to your portfolio.
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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