3 Value Stocks Near 52-Week Lows Worth Buying

These value stocks may be down, but they're far from out.

Sean Williams
Sean Williams
Dec 8, 2015 at 6:40AM
Investment Planning

Image source: Pixabay.

While many companies' shares are rising past their fair values now, others are trading at potential bargain prices. The difficulty with bargain shopping, though, is that you may be understandably hesitant to buy stocks wallowing at 52-week lows. In an effort to separate the rebound candidates from the laggards, it makes sense to start by determining whether the market has overreacted to a company's bad news.

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

The smart way to play the energy sector
There's no two ways around it: The energy sector has been absolutely hammered by falling oil and natural gas prices. Pretty much every company within the sector has been hit, and Kinder Morgan (NYSE:KMI) is no exception.

Kinder Morgan is an infrastructure giant within North America, operating some 84,000 miles of pipelines for liquid natural gas, natural gas, and oil, as well as roughly 165 terminals. The company also deals in the storage, processing, and transmission of these fossil fuels. As you might have surmised, a drop in the underlying price of the commodities it deals with has left shareholders and Wall Street concerned that demand for Kinder Morgan's services could drop. More immediately, the fact that Kinder Morgan's board may reconsider its aggressive dividend growth plans has thrown a wrench into investors' long-term plans. Shares of Kinder Morgan have tumbled by roughly a third over the past seven trading sessions. 

Image source: Kinder Morgan.

Although it's been a rough ride down, I believe now could be the time to consider dipping your toes into the water. The reasoning is simple: the U.S. has pushed to make itself as independent as possible from foreign oil. Shale discoveries over the past two decades have done exactly that, and the likelihood of oil and natural gas prices remaining low for significant periods of time appears low in my book with the accepted belief that U.S. demand for energy will rise over time.

How best to take advantage of rising energy demand? With companies that invest in infrastructure, of course. Owning companies that store and transport fossil fuels is where I believe the big bucks are to be had from the U.S. shale revolution, and Kinder Morgan is at the heart of this trend.

From the perspective of valuation, Kinder Morgan may not look cheap -- but this isn't your typical value stock. Kinder Morgan's cheapness can be found in its book value and its cash flow per share, which is what supports its current yield of 10.6%. Kinder Morgan is nearly trading at book value following last week's thumping, and it's expected to generate in excess of $2 per share in cash flow in each of the next four years. Even if there is a slowing of dividend growth, or even a cut, investors look poised to reap handsome rewards over the short- and long-term.

Going against the grain
Next up, I'd suggest value stock seekers look toward the consumer cyclical sector and dig deeper into motorcycle, snowmobile, and off-road vehicle (ORV) manufacturer Polaris Industries (NYSE:PII).

Until this year, Polaris has been practically unstoppable, with its share price growing by roughly 1,400% between 2008 and 2014. This year has been another story altogether. Motorcycle demand has been strong, with retail demand up 60% year over year in the third quarter and sales up 154%, but ORVs, which account for more than half of Polaris' sales, grew by a more modest 3%. Growth in this segment has been slowing in recent quarters, prompting a downgrade and price target cut from research firm Wedbush Securities. James Hardiman, Wedbush's covering analyst, also foresees short-term weakness derived from the evolution of new products for Polaris that could adversely affect margins.

Image source: Polaris Industries. 

As for me, I see a potential opportunity to buy into a discounted and highly profitable brand-name in recreational products. I believe the introduction of new all-terrain vehicle models, such as the four-seat RZR XP 4 Turbo EPS, could hamper margins in the near term, but will have a more positive effect of buffering and adding to Polaris' ORV market share. If I were a long-term shareholder, I would applaud Polaris' aggressive innovations and cost tactics if it meant getting a leg up on the competition in market share. As Polaris' share increases, its pricing power should increase in tandem, ultimately providing a big boost to operating margins.

There's also a lot to like about Polaris since its purchase of Indian Motorcycle in 2011. The American motorcycle consumer loves the story and heritage behind their purchase, and that's exactly what they get when buying Indian or peer Harlery-Davidson. The early numbers suggest that Polaris may indeed be pulling some diehard motorcycle enthusiasts away from Harley-Davidson, which is great news seeing as how production efficiency is also improving.

With well over $8 in EPS expected in 2016, value investors should consider giving Polaris a closer look.

Betting on an aging America
Finally, value stock investors would be wise to consider placing their bets on companies that stand to benefit from improving the lives of an increasingly older population. The Census Bureau projects that the elderly population in the U.S. could double to nearly 79 million between 2010 and 2050, meaning companies like DaVita Health Partners (NYSE:DVA) may be primed to benefit.

Image source: Flickr user Vic.

DaVita Health Partners runs more than 2,200 outpatient dialysis centers within the U.S., and another 104 in 10 additional countries. The investment thesis here is pretty simple: as we live longer lives, the chance that we'll need some form of dialysis due to kidney failure increases. For DaVita, an aging population would be great news since it's the dominant outpatient dialysis services provider in the country.

You might also like the fact that Warren Buffett, the so-called king of buy-and-hold value investing, also thinks very highly of DaVita Health Partners. Buffett's company, Berkshire Hathaway, currently holds more than 38.5 million shares of DaVita stock, equating to nearly $2.8 billion in market value and 18.3% of its outstanding shares. Buffett buying a stock can sometimes attract more buy-and-hold investors, thus reducing volatility.

The one thing you'll want to watch out for with DaVita is that its business is dependent on steady reimbursement growth over time. With Medicare looking to minimize the reliance of private businesses on the program, and private insurers with Medicare Advantage plans also reining in expenses, DaVita's growth could be choppy at times.

Despite this concern, DaVita is valued at an attractive 17 times forward earnings, and considering the nearly $2 billion in free cash flow it generated in 2013 and 2014 combined, a dividend may be a possibility at some point soon. It's a value stock you should have your eye on.