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.
Time to go shopping
This holiday season appears to have been déjà vu all over again for many mall-based retailers. After apparel retailers suffered through a notoriously bad back-to-school season and lackluster holiday sales in 2014, they again delivered some disappointing results to Wall Street.
Last week, Gap (GPS -6.04%) announced that net sales for the five-week period ending Jan. 2, 2016 fell 4% to $2.01 billion, or 3% if adjusted for currency fluctuations. Comparable sales for its stores fell a collective 5% year-over-year, with Banana Republic comps down 9%, and Old Navy comps dipping 7%. In fact, Gap shares have now lost about half of their value in less than a year.
On the surface there's no sugarcoating Gap's near-term weakness. But I view this weakness as a possible long-term buying opportunity.
To begin with, one of the biggest issues with retailers this holiday season has been the unseasonably warm weather. Retailers have found themselves stuck with winter-wear that they simply can't sell, and they've responded with big discounts. I'm not a fan of beating up retailers over abnormal weather patterns since they'll eventually normalize over the long run.
More importantly, though, Gap has truly transformed itself this decade into a company that consumers want to shop at. Gap has emphasized its direct-to-consumer sales, and it made the aggressive move in 2012 to go outside the company for executive help. Gap wound up hiring Liz Meltzer, who'd previously been the senior vice president of merchandising at Uniqlo, and Jill Stanton, who was formerly the vice president of marketing for Nike, and is now the president of Old Navy. Much of Old Navy's positive transformation this decade can be credited to Stanton's influence.
Gap may not always have the right product for the season, but between its flagship Gap brand, Banana Republic, and Old Navy, I believe Gap has the tools to deliver modest long-term growth. Priced at just nine times forward earnings, I'd suggest value investors give this company a closer inspection.
This derailment is an opportunity
Another company that's been having a rough go of things over the past year is Genesee & Wyoming (GWR). Genesee & Wyoming is a railroad company that predominantly operates in the U.S. and Canada and is responsible for more than 14,000 miles of track. Unfortunately for investors, shares of the company have dipped by more than 50% over the past year.
"What's wrong," you wonder? The big issue has been the tumble in commodity prices -- specifically coal. A combination of coal oversupply and weakened coal prices have reduced coal shipments and directly affected the pocketbooks of railroad companies. For November G&W noted that carloads of coal and coke dropped 45% year-over-year. We've also witnessed price declines in crude, most metals, and grain, which, not surprisingly, led to metal and agricultural carloads declines of 28% and 5%, respectively, in November.
Like Gap, there's no sugarcoating the weakness G&W is dealing with at the moment. But I see light at the end of the tunnel.
For instance, I'd look to coal to be a boon for railroads over the long-tem as opposed to a hindrance. Even with the proliferation of solar and natural gas, the Energy Information Administration noted that coal accounted for 39% of all electricity generation in the U.S. in 2014. That makes coal still the dominant energy source in the United States. Even if coal continues to be de-emphasized domestically, it's a critical energy source for emerging markets such as China, and perhaps throughout Southeast Asia and India. Transport to terminals could be big business for railroads like Genesee & Wyoming.
The expected growth in the U.S. population provides another long-tail growth opportunity for the rails. More people should mean growing demand for agricultural, petroleum, chemical, waste, and food carloads. Again, this isn't a quick catalyst that will flip a switch and make everything magically better, but as a cyclical company G&W should be in line to benefit more often than not over the long-term as the U.S. economy expands.
Lastly, don't forget about the fuel-efficiency of the rails. Railroads may not deliver goods to your doorstep, but in terms of fuel costs per ton transported it's hard to beat the efficiency of railroads. When fuel prices eventually do begin to creep higher I expect G&W to be a beneficiary. Sporting a forward P/E that's now fallen under 12, I believe Genesee & Wyoming could be the perfect value stock for long-term investors to consider.
Lastly, we'll saunter over to the biotech sector and take a closer at why AMAG Pharmaceuticals (AMAG), a developer focused on anemia, maternal, and cancer support drugs, could be a value stock worth adding to your radar.
AMAG Pharmaceuticals has run into a veritable brick wall since mid-July when its shares hit $76. As of this past Friday, AMAG shares had dipped to about $23. Shares have been crushed by weakness in Makena, AMAG's top-selling drug designed to prevent preterm birth in at-risk women. AMAG had been hoping to receive Food and Drug Administration approval for a single-dose vial of the drug, but received a complete response letter instead. Additionally, AMAG has been dealing with possible generic entrants. Long story short, its full-year sales guidance of $250 million to $260 million for Makena was below previous forecasts.
Now for the good news: even taking into account the sales reduction for Makena, revenue added from its purchase of Cord Blood Registry -- a stem cell collection and storage service -- along with sales of Feraheme and MuGard, create a scenario where AMAG's top- and bottom-line can grow for years to come. From the $413 million forecast by Wall Street in 2015, AMAG is expected to grow its sales to more than $675 million by 2018. AMAG's focus on niche drugs and growth by acquisition (along with its still relatively small size) should give it a way to deliver double-digit percentage growth over the remainder of the decade.
AMAG is also doing what it can to support its recently decimated share value. Last week AMAG announced a share repurchase program allowing it to buy up to $60 million in common stock. Purchasing shares can help to boost EPS and make a company appear even more attractive on a valuation basis -- as if AMAG's forward P/E of roughly four wasn't already attractive enough.
AMAG's reliance on Makena for around two-thirds of its revenue does give the stock some potential for negative exposure if prescription drug reform takes effect or if generics sweep the market. However, I believe that's been more than priced in at this point, and would encourage more risk-tolerant value seekers to give this company a look.