Wall Street analysts have soured on Teva Pharmaceutical (TEVA 0.16%), Fitbit (FIT), and Cirrus Logic (CRUS 2.99%) lately, but it could be worth adding all three of these beaten-up stocks to long-haul portfolios. Read on to find out why these Motley Fool contributors think people are too pessimistic about the future for these stocks.
A bargain-basement buy
Todd Campbell (Teva Pharmaceuticals): Only four of the 26 analysts that follow Teva Pharmaceutical rate it a buy right now, and given how reluctant Wall Street is to pan stocks, that makes Teva Pharmaceuticals one of the most unloved companies out there.
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The company's still the biggest generic-drug maker on the planet, though, and while it's facing some competitive pressure, asset sales and cost-cutting decisions could help it emerge from its struggles a more profitable company.
Shares have tumbled because of its indebtedness and competitive threats to its best-seller, Copaxone. Those headwinds won't disappear for a while, but I don't think either of these challenges is insurmountable.
The launch of generics from competitors will cause Copaxone's sales to fall from over $3 billion to less than $2 billion this year, but at some point, sales will reach levels where additional declines can be offset by revenue growth by new generic-drug launches.
The $33 billion in debt on the books due to its dubious decision to acquire Allergan's generic-drug business in 2016 isn't going to get wiped out overnight, but Teva Pharmaceutical remains cash flow positive, and divestitures and cost-cutting that could free up $3 billion annually beginning next year should allow it to reduce its borrowings over time.
Also, headwinds to its shares could shift to tailwinds soon because Allergan recently completed selling the 100 million in Teva Pharmaceuticals shares it acquired in its 2016 deal, and Warren Buffett's Berkshire Hathaway (BRK.A 0.99%) (BRK.B 0.91%) could continue adding to the new position it established in the company late last year.
Granted, this company's got work to do to get back on track, but I think long-term investors could end up making money buying now.
A decimated stock
Tim Green (Fitbit): There's no shortage of reasons to avoid shares of Fitbit like the plague. The stock has lost 90% of its value since peaking after its initial public offering in 2015. Once-robust demand for its fitness trackers has tumbled. And the company's first effort at entering the smartwatch market was a failure. The Ionic, priced at $299, just wasn't good enough to compete against the Apple Watch.
Despite all of this, there are two reasons to not completely give up on the company or the stock. The first is Fitbit's fortress balance sheet. The company had $679 million in cash and no debt at the end of 2017. That cash represents more than half of Fitbit's market capitalization, and it gives the company plenty of time to figure out how to return to growth and profitability.
The second reason is Fitbit's second smartwatch effort, the Versa. This $199 smartwatch, announced in March and now globally available, is priced low enough to have a good shot at compelling existing Fitbit fitness tracker users to upgrade. The Ionic was too expensive; the Versa looks just right.
A Fitbit comeback may still take years -- or it may never happen at all. But I think counting the company completely out at this point is too pessimistic.
A fabless manufacturer with fabulous cash flow
Rich Smith (Cirrus Logic): Cirrus Logic may not be a household name, but this "fabless" semiconductor manufacturer (meaning, a chip company that outsources the actual production of its chips) provides parts that show up in many of the items you use every day. The company's chips can be found in electronics from Bose, LG, Nikon, Samsung, and of course Apple -- to name just a few.
Wall Street isn't at all impressed with Cirrus's name-dropping, though, focusing instead on the fact that Cirrus posted an 8% decline in sales in its most recent quarter and a 72% drop in profits. Wall Street bid down the stock by 30% year to date, but I think that's a mistake.
Does Cirrus depend too heavily on Apple to drive sales? Undoubtedly. Last year, Cirrus reported that Apple accounted for 79% of its sales. Still, that generally works out pretty well for Cirrus, which has posted positive free cash flow for the last 12 years and generated $284 million in positive FCF last year.
At a price-to-free cash flow ratio of just 8.1, Cirrus stock has been left for dead. But only modest growth in profits would suffice to justify the stock's current stock price -- and analyst predictions are anything but modest, calling for 15% annual profit growth over the next five years. Anyone who dismisses Cirrus based on its recent poor results, when its future looks this bright and its stock is this cheap, is making a huge mistake.
