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.
Banking on teens
Ask anyone, and they're bound to tell you that betting on teen retailing trends can have just about as good odds as playing the roulette table in a casino. Teens are very fickle when it comes to trends, and parents, since the recession, have been quite particular about pulling out their credit cards for a purchase unless there is a demonstrable perceived value in the clothing offered.
Aeropostale (NASDAQOTH:AROPQ) has certainly been moving its lower-priced merchandise in recent months, but at very steep discounts while its higher-margin branded apparel remains on store shelves. The company's second-quarter results were pretty similar to its peers -- a 15% decline in same-store sales and a $0.34-per-share loss that was $0.05 wider than analysts expected. The same story was true for American Eagle Outfitters (NYSE:AEO), which fits a niche often higher than the Aeropostale price point, but lower than Abercrombie & Fitch. American Eagle reported a 7% decline in same-store sales (and that was with its online business included) and guided its upcoming quarter far below Wall Street's expectations. The story here is simple: Parents are holstering their cash this back-to-school season.
But the good news is that parents are just about as fickle with their spending habits as teens are with what's cool. Spending trends in the retail sector are often cyclical, and the best time to buy into well-financed retailers is when no one wants them. Aeropostale is certainly looking like a gamble, with the company doubling its previous estimate of store closures to rein in expenses, but it also is still on pace to remain profitable thanks to the holiday season and does have $100 million in cash with no debt to fall back on. If Aeropostale can get back to what it does best (i.e., churning low-priced teen clothing) while also cutting expenses, I could see shares doubling from current levels within three years.
Looking toward life's necessities
If you've followed this series for a while, you probably know by now that I love to find companies that provide the basic necessities of life but are trading closer to a new 52-week low than a high. One company that perfectly fits that bill is electricity and gas distributor National Grid (NYSE:NGG), which has the bulk of its operations in the U.K. but also operates in the New England area of the United States.
Over the past couple of years, more high-profile, faster-growth companies have taken advantage of low interest rates to rapidly expand, which has pumped up their share price and lured in investors. In the meantime, slow-but-steady growth story National Grid, which supplies electricity, natural gas, and natural gas liquids, (i.e., a basic necessity if you live under a roof), has languished despite a nearly 7% dividend yield!
In National Grid's annual report, which it released in May, the company delivered an operating profit that rose 6% as revenue jumped 4%. Overall EPS rose 13% thanks to tight cost controls, while it was announced that the company would pay out a dividend that would rise to keep pace with RPI inflation for the foreseeable future. This is the epitome of a basic needs stock with a fantastic yield that income seekers should consider digging more deeply into.
If you can't beat them, eat them!
The upside of the technology sector is that it gives you the chance to invest in some of the newest and potentially life-changing technologies. On the other hand, the "tech replacement cycle" is the worst of all three-word phrases for tech investors as natural evolution cycles in technology tend to cause orders to ebb and flow every few years. Thus has been the case in recent months with Maxim Integrated Products (NASDAQ:MXIM), a manufacturer of linear and mixed-signal integrated circuitry primarily used in communication devices.
In its recently reported fourth-quarter results, Maxim alluded to weakness in its smartphone product sales, which caused it to fall short of its own revenue and EPS expectations. The good news for shareholders is that Maxim is doing everything in its power to abate overblown fears of slowing growth by authorizing a new $1 billion share repurchase agreement, boosting its quarterly dividend to $0.26 for a new forward yield of 3.8%, and paying down $300 million in debt.
The biggest news, though, might be its $605 million purchase of Volterra Semiconductor (UNKNOWN:VLTR.DL), a manufacturer of integrated voltage regulators (a fancy phrase meaning circuitry that controls power levels), which looks as if it'll be immediately accretive to Maxim. Volterra was operating in a highly competitive space. With Maxim's more streamlined operations and cash flow, Volterra's product line should be better able to compete against its larger foes, while Maxim shareholders should enjoy an immediate boost to the bottom line while getting larger exposure to a rapidly growing smartphone market.
With a forward P/E of just 14 and a solid 3.8% yield, Maxim appears to be a tech company ready for a rebound.
This week was a reminder that great companies sometimes get lost in cyclical trends. It seems that Aeropostale, National Grid, and Maxim go through something similar to this every couple of years, yet they always seem to emerge stronger than ever. I trust the management teams of these three companies, and their historical performance, will prove me right in the end.