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3 Stocks Near 52-Week Lows Worth Buying

By Sean Williams – Jul 8, 2014 at 1:45PM

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

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.

A prime takeover target?
I'm not a huge fan of suggesting a stock could head higher solely on the basis of its takeover potential because most of those gut feelings often turn out to be untrue. But that didn't stop me from selecting ALLETE (ALE 0.48%) as this week's first selection.

Source: @wewon31, Flickr

ALLETE is primarily an electric services company based in Minnesota that also supplies some residential and commercial customers with natural gas and water services in Wisconsin. It also has a few smaller operations, such as a coal mine in North Dakota and real estate in Florida.

"Why is ALLETE a takeover candidate?" you wonder? First, its utility business is regulated. For a purchasing company (and for investors), that means easily calculable cash flow and pretty standard rate increase every few years.

Secondly, ALLETE is sporting a reasonably small amount of net debt at just $1.17 billion. Its enterprise value of $3.25 billion is right in the sweet spot for larger utilities looking to expand their geographic reach and add instant EPS accretion to their bottom line without it being too large to make financing a transaction of this size difficult.

Another aspect to consider is that a purchasing company could reduce their exposure to ALLETE's nonenergy businesses, as well as its purchasing price, by simply jettisoning noncore assets for cash. The coal mine would be worth keeping, as it supplies some of ALLETE's power plants, but there's no reason other noncore assets (like its Florida real estate) couldn't be sold to help offset the cost of a buyout.

Finally, ALLETE offers alternative energy generation through its subsidiary ALLETE Clean Energy, which is comprised of various wind, solar, hydroelectric, and biomass projects. Alternative energies are attractive carrots to dangle in front of larger utilities, some of which have been late to the party when it comes to developing these long-term low-cost assets.

Even if ALLETE isn't purchased, the company's growing book value, high payout ratio (which has resulted in steady dividend growth), and predictable growth potential make it attractive in my eyes at 16 times forward earnings and less than 12 times its enterprise value to EBITDA.

Dialed in on this stock
The cold and blustery winter was unforgiving to a number of sectors, especially retailers. Some are still suffering from the effects of skeptical investors, which is one reason why watch and accessories retailer Fossil Group (FOSL -2.21%) is dancing awfully close to a 52-week low.

Source: Derek Purdy, Flickr.

On one hand, Fossil's growth estimates simply didn't match Wall Street's for the second quarter. In May the company delivered Q2 EPS projections of $0.90-$0.97, while the Street was looking for something closer to $1.10. This caused all sorts of worries for investors who still remember the tumble Fossil took when its European sales dried up a few years back.

While retailers always deserve some skepticism because their business is naturally cyclical, Fossil's overall outlook would seem to be far more positive than investors are giving it credit for.

To begin with, Fossil is seeing sales volume growth or store expansion across the globe. U.S. sales grew by 7%, led by double-digit watch and jewelry product growth. Europe, which has been a sore spot in the past, saw wholesale net sales jump 14% to $25.2% million, with its watch and accessories segment also leading the way. And as should be no surprise, the high-growth Asia-Pacific region led with 24% net sales growth. In addition, direct-to-consumer sales increased 18%, though this was primarily because of expansion as same-store sales dipped 2.4%. In other words, sustainable high-single-digit growth is quite possible. 

Secondly, the market for watches remains strong despite the surge in smartphone sales. Skeptics have viewed watches as archaic items since cell phones can just as easily tell you the time. But what those skeptics fail to realize is that a timepiece is just as much a fashion statement as a time-telling device. According to the Federation of the Swiss Watch Industry, monthly exports have grown by 1% to 4% over the past 12 months, and while Fossil's movements don't compare to higher-end Swiss movements, it does decisively signal that watch interest remains strong around the globe. 

Finally, there's the value proposition of Fossil. In the past I can recall Fossil trading at some lofty P/E ratios in excess of 25 to 30. But based on its projected growth rate in the high single-digits, its forward P/E of less than 14 appears attractive and gives the company room to run with a PEG ratio well below two.

Long story short, I'm dialed in on Fossil and liking what I'm seeing thus far.

Source: Bob Mical, Flickr.

A tech-based cash cow
The final pick this week comes from the technology sector, and as a blaring warning to all readers out there, I already own this stock in my portfolio (and this is my second time in a couple of months selecting it), so you can expect some biases in my opinion. The company in question is networking and storage products specialist QLogic (QLGC).

The easiest way I can describe QLogic's 20% tumble since April is that it got "Emulexed." Yes, I'm making up words again, but it's what I define as being guilty by association with networking equipment provider Emulex (NYSE: ELX), which was bludgeoned in early May after forecasting EPS of zero to $0.05 in the fourth quarter compared to prior Wall Street expectations of $0.18 in EPS. With QLogic's fingers in essentially the same industries investors assumed that it, too, would report dismal quarterly results. 

But here's the catch: It didn't.

Although QLogic's revenue was down roughly 1% year over year, its strict cost-cutting efforts pushed its adjusted profits higher to $0.24 per share from $0.17 in the year-ago quarter. In contrast, Wall Street expected just $0.22 in EPS, so this was a decisive beat. QLogic did report two one-time expenses that pushed the company to a GAAP loss, but given the one-time nature of these charges, that shouldn't factor too much into QLogic's share price.

In my opinion QLogic is poised to benefit from the trickle-down effect of telecom and big data spending. It takes time for the billions being spent on infrastructure to work its way down to networking equipment suppliers, but at 10 times forward earnings it's not as if there's a lot of risk involved in waiting for the revenue surge to materialize.

Also, QLogic has a monstrous pile of cash ($278 million to be exact) to go along with no debt. Couple that with free cash flow that has regularly averaged more than $100 million over the past decade, and an investor in QLogic could expect to see the company's cash balance balloon to its current market value in probably six to 10 years. I consider this an incredible cash cow and a potentially attractive takeover candidate, considering its rock-solid balance sheet and cash flow consistency.

Sean Williams owns shares of QLogic but has no material interest in any other 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 recommends Fossil. 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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