While many companies' shares are rising past their fair values now, others are trading at potentially 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.
Nursing your portfolio to profits
This week we're going to start off by examining a company in the healthcare sector that's had nothing short of a miserable year: Genesis Healthcare (NYSE:GEN).
Shares of Genesis are off 58% year-to-date despite it and Skilled Healthcare completing their merger earlier this year. What's ailing Genesis, a company that specializes in post-acute care for patients needing rehabilitation? It's primarily the fact that Medicare reimbursements are under pressure as the Obama administration works to remove some of the reliance of private companies on government-sponsored programs. Additionally, Genesis is carrying around a mammoth $5 billion in net debt following its merger, and the prospect of challenged Medicare reimbursements makes its debt load look even scarier.
But call me crazy, because I see value in Genesis Healthcare at its 52-week low. For starters, Genesis announced during its third-quarter report that it's looking to monetize non-core assets over the following nine-month period. Management anticipates this will lead to $100 million to $150 million in proceeds that it can use for acquisitions, or to pay off its most expensive debt. It also refinanced $360 million in HUD-insured loans to a lower rate, saving itself precious cash flow in the process. While Genesis' debt level remains high, I believe it's manageable considering the company's long-term outlook.
What's intriguing about Genesis is the role it could play in an aging U.S. population. U.S. Census Bureau projections suggest that the number of elderly Americans could double between 2010 and 2050, presumably providing Genesis a higher influx of patients as preventative treatment options improve in the hospital setting, and also improving demand for senior-assisted living communities. If Genesis' margins get squeezed a bit, it looks as if it could win based on sheer volume.
Currently valued at less than nine times forward earnings, I believe Genesis could be an attractive value stock for investors who understand this is a long-tail growth opportunity.
What's in "store" for the future?
Next up, I'd encourage value stock seekers to examine a company that, for the time being, doesn't look like much of a value stock at all, Mobile Mini (NASDAQ:MINI).
Mobile Mini is a provider of portable storage containers for businesses throughout North America and the United Kingdom. The big issues at the heart of Mobile Mini's recent weakness include its high debt-to-equity of 116%, its astronomical trailing P/E over the last 12 months, which is well in excess of 100, and the fact that it's missed Wall Street's EPS estimates in six of the past 10 quarters.
As I said, it really doesn't resemble a value stock, unless you take the time to dig below the surface. If, however, you do some probing, you'll find a niche company with strong pricing power that should be on the radar of value investors.
One aspect of Mobile Mini that I find most intriguing is that it could benefit in any rate environment. The Federal Reserve keeping lending rates near historic lows for seven years created an environment that allowed businesses access to cheap capital. This cheap capital gave them the ability to expand by leaps and bounds -- and it's possible with rates still near their lows that construction could remain robust. But even if lending rates rise, this could "trap" business in their current locations since loans become more expensive. If so, Mobile Mini's storage solutions could be in line to benefit.
Additionally, in mid-December Mobile Mini announced the refinancing of its $1 billion credit facility, with an applicable reduction of 50 basis points for LIBOR loans. That may not sound like a lot, but it could eventually save Mobile Mini tens of millions of dollars in cash flow, which it could instead use to funnel money to shareholders via its dividend.
Furthermore, data in the third quarter suggests demand and pricing for Mobile Mini's products is strong. Total rental revenue grew 19% year-over-year, with core activations up 12%, and both unit demand and rental prices rising.
Mobile Mini's forward P/E of 20 might not look like a "value" in the traditional sense of the term, but this is a company that I suspect could grow its EPS by an average of 10% throughout the remainder of the decade.
Styling and profiling
Finally, value investors would be wise to consider taking a long look at upscale retailer Nordstrom (NYSE:JWN) following its tumble during the fourth quarter.
The bulk of the pain Nordstrom shareholders felt came on Nov. 13 when Nordstrom lost about a fifth of its value. The retailer delivered revenue of $3.33 billion in the third quarter, but posted EPS of just $0.57. Wall Street had been looking for Nordstrom to deliver $0.72 in EPS on $3.37 billion in revenue. Nordstrom also cut its full-year EPS to a range of $3.30 to $3.40 from a prior forecast of $3.85 to $3.95, adding even more pressure. Nordstrom blamed the miss on softer sales across a number of categories, as well as the divestment of its credit card portfolio, which reduced its Q3 EPS by $0.15.
But there are reasons to believe Nordstrom could be set up for a well-deserved rebound over the long run. To begin with, Nordstrom's core customer tends to be more affluent, which also means they're less prone to pain caused by recessions and economic hiccups. As we saw this past quarter, this doesn't completely absolve Nordstrom of softer sales quarters from time to time when consumers become more cost-conscious, but it does help minimize how often this happens.
Another reason Nordstrom is such a valued retail brand is that it does its best not to cheapen the Nordstrom name. Although Nordstrom does run a sale event two times a year, it doesn't count on sale events to drive growth, unlike most of its department store counterparts. The problem with sales is they can cheapen the image of a company and hurt margins. By holding its ground, Nordstrom maintains the integrity of its brand.
Despite its recent weakness, Nordstrom's direct-to-consumer sales remain strong, and it also boasts brands within its stores that consumers want. As such, I'd have my eyes focused on the more than $4 in EPS Nordstrom is expected to generate by 2018.
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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