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.
Patience will prevail
This year has been nothing short of a nightmare for shareholders in Emeritus (UNKNOWN:ESC.DL), a large operator of assisted-living communities specializing in Alzheimer's disease and dementia. The share price has been absolutely throttled, with the Centers for Medicare and Medicaid recommending ongoing reductions in reimbursement rates for senior living facilities. In addition, Emeritus' aggressive expansion has hampered its near-term results, putting even more downside pressure on its shares.
The good news is that I'm always looking for contrarian opportunities, and I feel now could be the entry point long-term-oriented investors have been waiting for. One of the bigger drags in Emeritus' previous quarterly reports had been a declining occupancy rate. Simply put, empty beds don't drive service fees, so the higher the occupancy, the better. In the second quarter, Emeritus saw occupancy tick higher by 30 basis points to 86.7%. Furthermore, Emeritus also stuck to its guidance in early September, forecasting adjusted-cash from facility operations of $1.95 to $2.05 for the year, or less than 10 times its current share price.
There's also a strong possibility that senior-living occupancy is going to rise over the next two decades as baby boomers age and enter the retirement community age beginning in about 10 years. I know we're talking quite a ways down the road, but the primary goal of Emeritus' numerous purchases is to set the company up for long-term success. Even with reduced reimbursements rates from the CMS, the sheer volume increase that could be headed Emeritus' way makes for a potentially intriguing play.
The exaggerated decline of king coal
If you think assisted living facilities have had it rough, then you've obviously not been a coal investor over the same time frame. Coal companies have been hammered by falling commodity prices, weakening demand from China, and, in 2011 and 2012, by decade-low natural-gas prices that pushed some electric utilities to switch coal-fired plants to natural gas, further exacerbating the coal glut and harming prices. As for me, that's the perfect opportunity to look for bargains in a beaten-down sector, and I just may have found it in small-cap Hallador Energy (NASDAQ:HNRG).
The thing to remember with coal is that despite the negative sentiment and the retiring of coal-fired power plants by high-profile utilities such as Duke Energy (NYSE:DUK), which is looking to cut costs by closing five Indiana-based coal plants years ahead of schedule, coal still accounts for about 40% of all electric generating capacity, according to the Energy Information Administration. That won't magically change overnight, meaning coal will remain a vital energy-producing asset in this country as well as in rapidly growing markets like China.
Hallador represents a unique opportunity, as it's one of the few coal producers that have remained healthfully profitable. Having surpassed Wall Street's EPS estimates in three of the past four quarters, Hallador has prebooked its entire production through 2014 and has another 1.2 million tons booked for sale from its 2015 haul. Even with pricing relatively unstable and certainly unfavorable from year's past, by selling its production years in advance Hallador is gaining a visibility advantage on its peers, which allows it to rein in costs and maximize profits.
With Hallador valued at a mere nine times forward earnings and coal prices stabilizing, I see a lot of potential for a multiyear rebound once investors come around to the idea that coal is still a viable energy source in the U.S.
A metals play you need to watch
Sticking with the commodities sector, the final beaten-down stock worth another look this week is Stillwater Mining (NYSE:SWC). Stillwater is a miner of platinum-group metals, or PGMs, such as platinum and palladium. Like much of the metals sector, the inevitable removal of the Federal Reserve's quantitative easing at some point over the next couple of months is adding downward pressure on these stocks' share price, as these metals are often viewed as an inflationary hedge.
What's interesting in Stillwater's case is that PGM pricing has remained relatively stable throughout the past year thanks to strong auto demand, allowing it to reduce its capital-expenditures budget and lower its mining costs, thus retaining annual profitability, whereas many of its peers in gold and silver mining have not been able to.
Furthermore, production has fluctuated only minimally, with PGM's mined down just 1% year over year. What this signals to me is that Stillwater's mines are operating near their maximum efficiency. When you add to this the fact that Stillwater has numerous other projects in the mix in Montana and Canada there's the potential for impressive double-digit bottom-line growth potential.
Stillwater might not appear inexpensive at 18 times forward earnings, but it's valued at just 16% more than book value and boasts $143 million in net cash, which should give value investors reason enough to dig a bit deeper.
This week's theme is that patience prevails over the long run. Near-term weakness in commodity pricing and senior-living reimbursements is certainly reason for these three stocks to be struggling. However, as the baby boomers age, the demand for energy increases, and the need for conductive metals for electronics and automobiles rises, all three of the above stocks will be set up for long-term success.