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 stocks 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.
Roll the dice with this long-term play
Success in the gaming sector can be somewhat hit or miss, given the harsh reality of the sector being cyclical and highly dependent on the growth of the U.S. economy. Some hotel and resort operators have turned overseas for growth prospects, while other have entrenched themselves in the U.S. for better or worse. For International Game Technology (NYSE:IGT), or IGT, things have definitely swayed toward the "worse" side of late.
Last week, IGT reported its second-quarter results, noting that revenue fell 15% year over year to $512.8 million, while EPS dipped by two-thirds to just $0.10 from $0.29. IGT blamed its weaker revenue on a 27% decline in slot machine sales despite a 4% increase in average machine price, as well as a 9% dip in gaming operation revenue as MegaJackpots revenue dipped during the quarter. This is the hit-or-miss nature of the gaming industry as I described.
But there are also reasons to believe that IGT may be an incredible bargain here as well.
First, there were rays of sunshine hidden within its cloudy report. For instance, the company's interactive/social-gaming segment saw revenue climb 27% as daily active users climbed 5% to 1.78 million from the year-ago period. This signifies to me that while the costs of research and development are high, IGT is making every effort to streamline its ability to meet an interactive and tech-hungry new wave of gamblers.
More importantly, IGT was granted one of only two online gaming licenses by the Nevada Gaming Commission in June 2012. Although this in no way allows consumers to gamble online as of yet, it does open the door for IGT to become one of the primary middlemen between the casinos and online consumers, should online gaming be legalized within the country. I consider this license to be extremely valuable and potentially under the radar of current shareholders in IGT.
Finally, the company stood by its previously lowered forecast, so it's not as if things are getting any worse. Cost-cutting and operational streamlining are being put in place to keep costs under control while the company refocuses its efforts on long-term growth avenues. For you the investor, it simply means that at 11 times forward earnings and with a dividend yield of roughly 3.5%, this could represent the perfect opportunity to buy into this turnaround at an attractive price.
Bed Bath & Beyond the skeptics
Sticking with our theme of disappointing earnings reports, home furnishing chain Bed Bath & Beyond (NASDAQ:BBBY) put up a perceived stinker of a quarter almost three weeks ago.
For its fiscal fourth quarter, Bed Bath & Beyond delivered $1.60 in adjusted EPS, down from $1.68 in the prior-year quarter, while net sales dipped 5.8% to $3.2 billion. Although the polar vortex negatively affected Bed Bath & Beyond's sales in Q4, it can't exactly use that as its sole excuse for weakness given that Hurricane Sandy caused similar weakness in its Q4 results in the prior year. The company is facing competition from all sides, with e-commerce platforms threatening to undercut its store prices and bricks-and-mortar warehouse retailers luring customers in with cheaper bulk deals.
However, as with IGT, I see ways for Bed Bath & Beyond to brighten its situation and turn shareholders' frowns upside down.
The big change that the company should make (note: "should" doesn't mean "will," and this is merely my opinion) is to begin paying a dividend. Historically, Bed Bath & Beyond has returned cash to shareholders through share buybacks, which reduce the number of shares outstanding and make the company appear cheaper from an EPS standpoint. While usually better than nothing, these buybacks don't put money directly into shareholders' pockets. With nearly $856 million on its balance sheet (more than $4 per share), no debt, and free cash flow that I suspect may top $900 million in 2014, the company in my opinion could easily afford a $0.25-per-quarter dividend to boost its yield over 1.5% and still have plenty of cash on hand to make acquisitions and perform buybacks as necessary.
There's also the idea that even if homebuying slows further -- it's already weakened from its multiyear highs set last summer -- consumers will lean on ways to remodel or improve their existing homes. This allows home-improvement and home-furnishing stores like Bed Bath & Beyond to shine. I'll admit that prior to being a homeowner, I didn't quite understand the allure of the company, but I now find myself to be fairly loyal to the brand for furnishings and accessories in select rooms of my home.
From a valuation perspective, 11 times forward earnings and cash flow seems pretty reasonable for a company that historically has traded closer to 13 times cash flow with a P/E ranging between 16 and 18. I would suggest digging deeper into Bed Bath & Beyond.
The Obamacare effect
Last but not least -- and keeping with our theme of weak earnings reports driving potentially attractive stocks lower -- we have a longtime favorite of mine, ICU Medical (NASDAQ:ICUI).
ICU Medical is a supplier of critical care, infusion, and oncology-based-IV equipment and products for the health-care sector. On paper the story makes a lot of sense. As the population ages you would expect the need for infusion and critical care needs to increase. Even with fierce competition, the sheer increase in demand should push ICU Medical's top and bottom line higher.
That wasn't the case in the latest quarter, however. In the fourth-quarter, announced in February, ICU posted a 6% decline in revenue although adjusted profit increased slightly to $0.86. But, the real reason for the boost was a significantly lower effective tax rate and not actual organic growth. To add, the company also recently replaced its CEO, adding uncertainty to ICU's direction and focus moving forward following two downward revisions in full-year EPS over just the past three months.
Yet there are three reasons I believe this short-term weakness represents a long-term buying opportunity.
To start with, I suspect much of ICU's recent weakness came from a spending pullback from hospitals and insurers in the wake of the implementation of Obamacare. No one was quite sure what to expect based on early enrollment figures or costs. However, with enrollment of 7.5 million topping original estimates from the Department of Health and Human Services, it's somewhat apparent that the worry was for naught. I would expect a quick rebound in critical care orders in the coming quarters.
Second, there's a bounty of opportunity for its oncology segment to grow. On the bright side, people are living longer in the U.S., but with increased age comes the increasing risk of cancer risk. Age is one of the most common risk factors for a number of cancer types. This means ICU's oncology segment may have double-digit growth written in the cards throughout the remainder of the decade.
Finally, ICU has an impressive downside buffer of $297 million in cash with no debt, or nearly $20 per share in cash. Despite two earnings revisions, ICU is still healthfully profitable, and its strong cash position gives the company more than enough wiggle room to turn itself around.
For more risk-accepting, health-care savvy investors, I'd suggest giving ICU Medical a closer look.
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.
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