Just as we examine companies each week that may be rising past their fair values, 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.
Shaking things up
Let's start with a small-cap company that processes seismic data for the oil and gas industry.
This week's stock of intrigue is Dawson Geophysical (NASDAQ:DWSN), which works with oil and gas industries within North America to help locate asset fields via seismic interpretation so that exploration and production companies know where to drill. Really, what Dawson does spurs the entire production industry, so I'd quantify it and its peers' roles as quite safe.
Dawson was knocked off its high horse in early February after the company reported a surprisingly large loss of $0.36 per share, reversing a year-ago profit of $0.36 per share as cold weather, weak demand, and low utilization rates for its equipment and employees sacked its results. Many investors took this as their cue to run for the hills. I see this as a possible buying opportunity.
For one, straight from Dawson's press release: "Demand for the company's services remains steady." Dawson notes that its demand has strengthened to normalized levels from the prior 12-month period, and it expects the full utilization of its crews in fiscal 2014 even inclusive of bad weather impacts. In other words, the past two quarters are not indicative of Dawson's typical performance.
Another overlooked aspect is that Dawson has an impressive balance sheet. Although the company ended the quarter with $20 million in debt, it anticipates repaying $11 million of that off over the next 12 months, and it still boasted more than $17 million in net cash as of the last quarter. Dawson also introduced a quarterly dividend of $0.08 per share, providing shareholders with a fresh yield just north of 1%.
All told, inclusive of its assets and cash, Dawson Geophysical is only trading at 12% above its book value and around 14 times forward earnings, which seems very inexpensive for a company that can grow its top line in the high single-digits to low double-digits each year. If you're a more risk-willing investor, I'd suggest shaking things up by giving Dawson a closer look.
This company is "sprouting"
Speaking of things that don't happen often, I'm stepping outside my usual comfort zone of fundamentally cheap investment opportunities with this next pick: Sprouts Farmers Market (NASDAQ:SFM).
Sprouts, a chain of natural and organic food stores throughout the U.S. that has emerged as perhaps Whole Foods Market's (NASDAQ: WFM) largest rival, debuted last summer to cheers, but it has recently been swamped by consumers who are leery of paying 60 times forward earnings for what is nothing more than a specialty grocer. Normally, I'd be jeering right along with the skeptics, but I see plenty of opportunity for share price advancement for Sprouts Farmers Market.
To begin with, the rate at which Sprouts is growing its store base is absolutely phenomenal. At the end of 2013, the company had 165 stores in operations, and its S-1 filing prior to going public notes that it anticipates growing its store base by at least 12% per year over the next five years. Obviously, this means higher expense growth than its rival Whole Foods, and possibly a more challenging EPS comparison to Whole Foods, but it'll easily allow Sprout's a quicker top-line growth rate. By my crude math, that would leave Sprouts with more than 290 stores by the end of 2018. Whole Foods, to add context, currently has 373.
Same-store sales growth is another defining factor. Once again, based on Sprout's S-1, we can see that same-store sales growth averaged nearly 10% in 2012 and was still a brisk 2.3% in 2010, coming out of the worst recession this country has witnessed in seven decades. This is notable because, as I've pointed out in the past with Whole Foods, consumers are willing to pay more for natural and organic food as long as the perception is there that they're getting more nutritious food. To put it another way, it means Sprouts has strong pricing power and a fairly steady customer base.
Right now, Wall Street is still trying to get a feel for how quickly Sprouts can grow, so I'd anticipate earnings season may be a volatile time for this company for at least the next year. However, if I were to choose between Sprouts and Whole Foods over the next five years, I'd say Sprouts has the best chance to outperform.
Passing the test
Just so I can have the pleasure of going three-for-three in the surprise column this week, the final company we're looking at also breaks my usual fundamental rules given that it's losing money. Nonetheless, I believe value-oriented, tech-savvy investors would be smart to have small-cap Cohu (NASDAQ:COHU) on their watchlists.
Cohu is a developer of test equipment for the semiconductor industry. In its recently reported fourth-quarter results, Cohu notes that a whopping 84% of its revenue came from the sale of semiconductor test equipment, with microwave communication equipment and video camera sales comprising the other 11% and 5%, respectively. As you're likely aware, the semiconductor industry is very, very cyclical, and a recent retraction in industrywide demand has put pressure on automatic test equipment manufacturers like Cohu. Unsurprisingly, Cohu reported another sizable loss in the fourth quarter and full year.
However, 2012-2013 look as if it was the trough of the latest cycle, with a number of semiconductor companies predicting smoother times ahead with data center and networking build-outs on nearly every businesses to-do list. Looking ahead, Cohu is valued at a breathtakingly cheap eight times forward earnings, and slightly less than its book value. What's more, like most semiconductor equipment companies that understand how cyclical this business can be, it has no debt and carries more than $2 per share in cash. Oh yeah, and how could I forget? It also pays a $0.06 per quarter dividend, which currently translates into a 2.6% yield!
Putting industry cyclicality aside for a moment and understanding that timing these peaks and troughs is practically impossible, I believe the risk-reward ratio for Cohu has swayed decisively toward the reward column at these levels.
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.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. The Motley Fool owns shares of, and recommends Whole Foods Market. It also recommends Dawson Geophysical. 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.