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.
This valuation stinks
The fertilizer certainly hit the fan late last month after Russia's Uralkali, the largest maker of potash in the world, decided it would no longer be part of a price-fixing cartel and would instead sell its potash on the open market at spot prices. Needless to say, potash producers were creamed on the news with the expectation that potash prices might fall by as much as 25%.
For some, the haircut they took makes sense. I keep pointing back to Intrepid Potash (NYSE:IPI) as my sector guinea pig, but with good reason. Intrepid Potash received 84.4% of its revenue in the latest quarter strictly from potash sales, so a reduction in selling prices here will cripple its margins. It also doesn't have nearly enough capital to mix up its product line or make acquisitions to stave off this risk.
On the other hand, the negativity surrounding South America's Sociedad Quimica y Minera de Chile (NYSE:SQM), which I'll just refer to as SQM to save time, makes little sense to me. Shares have been cut about 58% from their 52-week highs despite the fact that it continues to deliver revenue and profit growth in an environment with lower spot commodity prices. What intrigues me most about SQM is its business diversity. The company, in addition to potash, makes iodine and lithium-based plant nutrient derivatives and also has an industrial chemicals business. Although some of these businesses are dependent on a growing global economy, most of its business will naturally grow as the need for more food and higher crop yield increases as the world's population grows. Furthermore, SQM looks as if it's about to make big gains in the iodine and lithium nutrient derivatives market.
With SQM valued at 14 times forward earnings, I believe the negativity surrounding potash prices has been more than accounted for in its share price and would recommend digging deeper into what could be a very profitable international crop nutrients play.
Play into this cyclical stock
While always thinking for the long term, sometimes intriguing intermediate-term investments of one to three years do rear their head. This is exactly what I feel we have in semiconductor test equipment maker LTX-Credence (NASDAQ:XCRA).
LTX-Credence's third-quarter results released in May weren't too encouraging -- there's no sugarcoating it. The company's boost 18% boost in revenue was welcome news, as was its narrower quarterly loss, but revenue for the third quarter and upcoming sales guidance for the fourth quarter (which it's yet to report) both came in below the Street's expectations. In today's global economy, many wireless and PC businesses are holding back on orders until growth prospects are clearer, and that is hurting LTX-Credence's outlook.
The good news is, it is historically the best time to buy LTX-Credence when things are the most glum. You see, the company keeps an excessive backlog of cash on hand because it understands the cyclicality of its equipment business. In the latest quarter, LTX-Credence ended with $2.66 in cash per share compared to zero debt. Considering that the stock closed yesterday at $4.92, investors have quite a bit of cushion below them if this weakness continues for two, four, or six more quarters.
Historically, though, if you look at the pattern of infrastructure improvements in the wireless sector and in PCs (commonly known as the tech replacement cycle), LTX-Credence finds its boosts about once every three to four years. The last time LTX-Credence really had an exceptional sales year was 2010, so I feel fairly confident when CEO Dave Tacelli proclaims that the second half of 2013 will be much better than the first. Going with the tech replacement trends and being well protected by a hefty cash position, I feel LTX-Credence could surprise investors over the next two to three years.
Drink up this stock
I've said it before and I'll say it again: If basic needs stocks hit a new 52-week low, there's a really, really good chance that's a strong buying opportunity.
Brazil's water and sewage giant Companhia de Saneamento Basico de Estado de Sao Paolo (NYSE:SBS), better known as SABESP, have seen shares halved in the past couple of months on numerous concerns. First, there are worries that Brazil's economic growth is slowing, which could adversely affect SABESP's bottom line. Second, SABESP has been expanding its infrastructure and customers reach, which has also allowed its balance sheet to become more riddled with debt. Finally, there are ongoing political concerns in South America that threaten to derail growth.
What I'm here to point out is that these are nothing more than concerns at this point and the fact of the matter is that SABESP is delivering consistent growth. In its second-quarter results released last week, SABESP delivered 13% net operating revenue growth and a 24% rise in net income. I'm definitely not a fan of SABESP's debt levels, but I'm comforted by the near-certainty that the water utility and sewage demand business brings to the table. With a minuscule forward P/E of just 6, now is the time to drink up this overseas deep-value play.
This week's theme is all about buying into businesses where a recent string of short-term bad news has been blown out of proportion. Potash, semiconductor equipment, and water demand are all going to rise over the long term, which bodes well for all three of these companies if they can keep their costs under control and remain innovative.