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3 Stocks Near 52-Week Lows Worth Buying

By Sean Williams - Feb 4, 2014 at 4:31PM

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

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

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

Can a deepwater driller get some love?
Out of the myriad of sectors in the market, deepwater and ultra-deepwater drillers weren't even in my line of sight in terms of picking a sector that would brutally underperform the broad indexes to start the year -- but have they ever underperformed. The one I have my eyes on this week is Ensco (VAL), an operator of roughly 74 rigs located around the globe.

Like the dry bulk shipping sector few years ago, the deepwater-drilling industry is being overwhelmed by a flood of new rigs from a number of rivals. The result has been an inordinate number of idled rigs at the moment and the potential for negative pricing pressures as these fleets expand. In November, for instance, contracted deepwater giant Transocean (RIG 2.93%) noted that approximately one-third of its rigs were still looking for work in 2014, with the report noting the upcoming delivery of eight rigs to Ensco and five to SeaDrill

Despite this near-term tumble, I believe now is the time to seriously consider Ensco for your portfolio. Relative to dry bulk shippers, which are still mired in a mess, the replacement process of retiring older deepwater rigs for newer ones should be quick and smooth, translating to contracted dayrates that shoul experience little to no downward pressure.

Also, keep in mind that the United States has made it clear that energy independence is among its highest priorities. This means a potentially easier permitting environment in the Gulf of Mexico and a race to unearth deepwater assets around the globe. It's not as if commodity prices for oil and natural gas aren't cooperating with Ensco and other deepwater drillers at the moment, so I'd look for production to step up sooner rather than later.

Finally, it's all about Ensco's valuation. Ensco is currently trading at just 93% of its book value -- a tad more than seven times its fiscal 2014 EPS projections -- and is yielding an astonishing 6.1%. This is another pick I'm seriously considering for my own portfolio.

The Big Mac of Latin and South America
Speaking of companies that have been absolutely clobbered by weaker-than-expected profits, we have Arcos Dorados (ARCO -0.54%), the Latin and South American McDonald's (MCD 0.20%) franchisee.

Arcos Dorados, which literally means "golden arches" in Spanish, has been plagued by higher labor and health costs in South America and hit by negative currency translation, and it has seen product demand ebb and flow. What we as investors need to realize is that the McDonald's of South America is a lot different from the McDonald's we're used to in the U.S. In many emerging markets, heading to McDonald's is the equivalent of a night out with the family, so Arcos Dorados needs to figure out ways to encourage customer traffic in regions where growth can sometimes be erratic.

Despite the fact that Arcos Dorados has lost about two-thirds of its value in just the past two-and-a-half years, I feel now could be the time to gobble up shares of this food giant.

What really intrigues me is the McDonald's brand name itself, which, next to Coca-Cola and a few other brands, is one of the most recognizable brands around the world. What this means for Arcos Dorados is the ability to trim expenses in order to improve efficiency, especially from its marketing budget.

Another factor to consider is that it's not as if Arcos Dorados isn't still cranking out healthy profits. Although EPS was lower in 2013 than investors would like to see, revenue growth in the region is still impressive. In Arcos Dorados' third-quarter report, the company delivered a 6.2% increase in sales but reported a truly impressive 18.5% increase in organic revenue, signaling that existing stores are finally driving more traffic. Once Arcos Dorados figures out how to really reduce its costs, it could become a juggernaut -- and a truly cheap stock. It's one I'm putting high up on my watchlist as a possible buy.

A bubble-licious opportunity
Speaking of highly short-sold companies that had an absolutely miserable January, there's SodaStream International (SODA), the developer of the popular at-home soda-making machines.

Short-sellers have been unrelentingly attacking SodaStream for years with the expectation that its growth would slow in similar fashion to 2011, when its share price caved approximately 50% in just a few weeks. Patient short-sellers were amply rewarded last month, with SodaStream guiding its full-year revenue about $5.5 million below its previous estimates and pushing its net income $12.5 million lower than its prior projection of $65 million. SodaStream ultimately blamed lower sales of its CO2 refill kits, negative currency translation, and an unfavorable product mix for the shortfall. 

While I have to agree with Fool Jeremy Bowman that this news is "disconcerting," it's also a classic overreaction from SodaStream shareholders.

First, you have to consider that SodaStream satisfies a unique niche that no other company is even close to conquering. The ability to personalize the soda-making process and create a razor-and-blades model that keeps the consumer coming back is a high-margin venture that will pay off in the long run. This specialization certainly deserves a premium.

Second, it's not as if growth has ground to a halt at SodaStream. Fiscal 2014 projections currently call for top-line growth of 17%, as the second half of the year is likely to see a nice rebound in high-margin CO2 refills. Remember that the holiday season often brings a greater number of soda machine purchases, so the "unfavorable product mix" is pretty normal for this time of year.

Lastly, to continue with our prevailing theme this week, it's all about SodaStream's valuation. Following the company's tumultuous drop, it's now trading at just 15 times forward earnings, which means a PEG ratio below one. Tack on $19.2 million in net cash, and I have more than enough reason to believe a rebound in SodaStream is coming.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of, and recommends, Coca-Cola, McDonald's, Seadrill, and SodaStream International. It also owns Arcos Dorados and Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

SodaStream International Ltd. Stock Quote
SodaStream International Ltd.
Arcos Dorados Holdings Inc. Stock Quote
Arcos Dorados Holdings Inc.
$7.32 (-0.54%) $0.04
Valaris plc Stock Quote
Valaris plc
McDonald's Corporation Stock Quote
McDonald's Corporation
$266.82 (0.20%) $0.53
Transocean Ltd. Stock Quote
Transocean Ltd.
$3.51 (2.93%) $0.10

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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