3 Stocks Near 52-Week Lows Worth Buying

Do these fallen angels deserve a second chance? You be the judge!

Sean Williams
Sean Williams
Mar 26, 2013 at 10:53AM
Investment Planning

Just as we examine companies each week that may be rising past their fair value, we can also find companies potentially trading at bargain prices. While many investors would rather have nothing to do with companies tipping the scales at 52-week lows, I think it makes a lot of sense to determine whether the market has overreacted to the downside, just as we often do when the market reacts to the upside.

Here's a look at three fallen angels trading near their 52-week lows that could be worth buying.

Steel of a deal?
Every once in a while I like to throw a highly speculative play into the mix, and make no mistake about it, AK Steel (NYSE:AKS) has all the makings of a high-risk, high-reward kind of play. From a financial perspective, AK Steel is a mess. My Foolish colleague Taylor Muckerman recently voiced his opinion that AK Steel's net debt of $1.18 billion was a serious concern, especially given how oversupplied the U.S. steel market has been and given AK Steel's consistent annual cash outflow.

To some extent, I agree wholeheartedly with Taylor. U.S. supply is still constrained, as is evidenced by AK Steel's first-quarter forecast of reduced sales to the spot market. However, the negatives surrounding both supply and pricing are beginning to abate.

AK Steel guided analysts to a substantially smaller first-quarter loss than in the sequential fourth quarter as it aims to reduce costs and boost average selling prices because of a better product mix. Also, don't overlook a ruling by the World Trade Organization last year that claimed China had no right to place high duties on U.S. high-tech steel. Those duties had basically shut AK Steel out of China during one of its highest-growth phases. With China once again looking for ways to boost its GDP through large infrastructure projects, AK Steel may find favorable and unmet demand overseas.

If AK Steel can survive this downturn, it could easily be worth more than double its current levels by 2015. The key word there is "if."

Hardly fizzling out
It's a bit hard to believe that a company with Coca-Cola in its name could be struggling, but that's precisely the case with Coca-Cola Bottling Co. (NASDAQ:COKE), which reported a year-over-year decline in profits three weeks ago.

The overall drop in sales and profits was quite nominal -- $29.6 million in net income in 2012 as compared to $33.3 million in 2011 -- but the simple fact that sales rose as income dropped is a bit disconcerting. In addition, Coca-Cola Bottling primarily bottles for Coca-Cola, but also is responsible for bottling and distributing products from Monster Beverage. That's concerning because of the ongoing FDA probe into the safety of Monster's products with regard to caffeine content and their effect on the body.

Yet, in spite of these concerns, I'm a gung-ho bull on Coca-Cola Bottling. For one thing, the majority of its workload comes from Coca-Cola, which is the most recognizable brand in the world and also offers one of the largest marketing budgets. The logo and marketing, which now includes a big push toward mobile advertising, practically allow the brand to sell itself. Also, the portion of sales made up by Monster is actually pretty minimal, with other smaller accounts, like Dr Pepper Snapple Group, and in-house products making up its remaining revenue stream. Coca-Cola Bottling isn't going to amaze Wall Street with exceptional growth, but it does have the brand-name backing and cost-cutting ability to continue to pay out modest dividends and deliver substantial annual profits.

Related Articles

The mortgage-REIT sector has been incredibly turbulent over the past year. My initial impression of mREITs was that the Federal Reserve's stance on keeping target lending rates between 0% and 0.25% through 2015 should have sent them significantly higher. However, we quickly learned that an absence of available mortgage-backed securities on the market due to increased competition among other mREITs, and because the Fed was purchasing $85 billion worth of Treasuries and MBS's each month, was making MBS's difficult to come by at a favorable price.

But the above hasn't dissuaded me from taking a bullish stance on CYS Investments (NYSE:CYS). CYS invests solely in agency-backed loans (those covered in full faith by the U.S. government in case of default), which means it usually deals with low-interest spreads -- in this case an adjusted 1.5% interest-rate spread net of hedge for 2012 -- but it can often lever itself to the brim without too much risk. Of particular interest is the sweet spot for mREITs -- which is the period between when the Fed winds down its MBS purchases and when it finally raises its target lending rate -- that I suspect is right around the corner. I figure that mREITs like CYS have a good three years of double-digit yields still to come before they pare back to a 6% to 8% range.

With CYS trading well below its net asset value of $13.31 per share, I'd say this appears to be a safe double-digit dividend and a company that could return in the neighborhood of 50% to 60% (cumulatively) to shareholders by 2016.

Foolish roundup
This week was all about digging deep for bigger trends. Whether it's finding the sweet spot for mREITs, expecting steel demand to rise due to exports to China, or relying on Coca-Cola's brand value to save the day, all three companies look primed for a rebound.

I'm so confident that these three names will bounce off their lows that I'm going to make a CAPScall of outperform on each one.