According to the efficient market hypothesis, stocks should trade right around their fair value based on all the available information. However, this is not always the case, as equity prices often fluctuate due to irrational factors. These fluctuations can create opportunities for savvy investors who can spot undervalued stocks and buy them at a discount.
Armed with this insight, I plan on buying two beaten-down stocks this week. Shares of both companies appear to have been unfairly punished by the market recently, making them potential bargains for patient investors. Read on to find out more about these two downtrodden stocks that might be worth buying on the dip.
Image Source: Getty Images.
1. Caribou Biosciences
Caribou Biosciences (CRBU -1.33%) is a small-cap biotech using an advanced form of CRISPR gene editing to develop novel therapies for various blood cancers. The biotech's stock rocketed earlier this month after Pfizer purchased a $25 million equity stake. However, Caribou's shares dropped by a hefty 18% last week after the company announced a $125 million public offering at $6.50 per share. At the time, this offering represented a 22% discount relative to its recent high in the wake of Pfizer's investment.
Why is Caribou stock a buy on this pullback? The company's novel chRDNA (CRISPR hybrid RNA-DNA) gene-editing approach holds the potential to be a best-in-class platform, which may lead to the development of important new therapies for scores of hard-to-treat malignancies. What's more, CRISPR gene editing has suddenly become a hot area for deal-making in biopharma. With a market cap that pales in comparison to most of its gene-editing peers and a major new stakeholder in the fold, I think Caribou stands out as an intriguing bargain for risk-tolerant investors right now.
2. AT&T
AT&T (T 1.02%) has been a factory of sadness for shareholders this year. The company's share price has reached a multidecade low in 2023 due to a confluence of unfortunate events, such as lower-than-expected free-cash-flow generation in the first quarter, concerns over its highly leveraged balance sheet, competitive positioning concerns, and worries about the potential legal ramifications stemming from its network of antiquated lead cables. On this last front, several analysts recently downgraded the telecom's stock due to the possibility of a class action lawsuit over these outdated lead cables buried across the United States.
Why is AT&T stock a contrarian buy? To be upfront, AT&T's fundamental picture isn't pretty. Its balance sheet is loaded with debt ($169 billion in net debt at the end of the most recent quarter), its near-term growth prospects are minimal due to emerging competition, and the telecom space is rapidly changing as a result of low-cost, wireless technologies that have significantly lowered the barrier to entry for newer companies.
The flip side of the coin is that AT&T is a highly entrenched competitor with top-shelf market shares in both wireless and fiber networking. Its costs should also fall significantly over the course of the year, leading to higher free-cash-flow generation in the second half of 2023.
Bottom line: AT&T's enormous 8.1% dividend yield is simply too enticing to pass up. While there are concerns that a dividend reduction may be on tap later this year, I think this possibility is already baked into the telecom's share price at these levels. Speaking to this point, AT&T's stock is presently trading at an incredibly low 5.5 times projected earnings. The telecom's shares have never been this cheap based on this valuation metric -- a fact that suggests that the market may have gotten carried away with its pessimism.
