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.
Can you hear me now?
It's been a particularly ugly start for the broad market since the beginning of the year, but suppliers to smartphone giant Apple have been particularly susceptible to the pain with sales of the iPhone 6s and 6s Plus appearing to have slowed a bit. One such supplier that's traipsing along at a 52-week low is Qorvo (NASDAQ:QRVO), the company formed by the merger between Triquint Semiconductor and RF Micro Devices that was completed a year ago.
Qorvo is a leader in RF solutions, and in the Chipworks teardown of the iPhone 6s following its launch it discovered an antenna switch module and power amplifier module belonging to the company, along with a separate RF5150 antenna switch. These may seem like small components, but they add up quickly when Apple is pacing 200 million-plus units per year. Thus, with Apple's iPhone sales potentially slowing, Qorvo announced earlier this month that its quarterly sales would be approximately $620 million, down from prior guidance in November of $720 million to $730 million.
I won't sugarcoat Qorvo's miss one iota -- it's not even in the ballpark. But, there's also a lot to be excited about when you look toward the horizon, which is how most investors should approach their investments.
For starters, the company has built a solid relationship with Apple and Samsung, and it's used those relationships to grow its RF solutions market share in top-tier and mid-tier smartphones while sacrificing its once dominant position in lower-tier 2G and 3G devices. Furthermore, merging gave the company far better scale, which in turn could improve its pricing and ability to boost margins in the years ahead.
Another important point is that Qorvo has an expansive opportunity outside the United States. Moving away from its previous hold on the 2G and 3G RF solutions market will probably be a smart move as countries like China begin moving heavily into 4G and LTE. Markets like China offer Qorvo an opportunity to substantial growth throughout the remainder of the decade and beyond.
Lastly, there's a strong financial backbone here with $120 million in net cash and operating cash flow over the trailing 12-month period of roughly $521 million. Valued at a minuscule seven times forward earnings, and trading below book value, Qorvo could certainly turn a view heads.
Digging deep for value
Another value stock that could deserve your attention, and a cyclical name whose shareholders fully understand the ups and downs of the economy, is Alcoa (NYSE:AA).
The aluminum giant has struggled in recent months, with China reporting slower growth and commodities as a whole weakening. Investors fear that weaker commodity prices and slowing global demand will sap what pricing power Alcoa currently has and hurt its aluminum business. Though we have observed some weakness in its bottom-line results, there are also reasons to believe Alcoa has a bright future ahead.
First off, Alcoa is staring down what's expected to be a transformative split in the second half of 2016. As announced last year, Alcoa is splitting itself into two companies in order to unlock shareholder value. The first company, which will keep the Alcoa name, will retain the aluminum business, as well as the bauxite-mining business, which has delivered exceptionally low costs and consistent profitability. The other company, which has yet to be named, will consist of global-rolled products and engineered products and solutions. Between the two, the second company is where there is serious growth potential, and it's the business intricately tied in with the strength in the auto sector.
Another point worth making is that Alcoa has done a lot of lever pulling by reducing its smelting capacity to cut costs, and has added value with acquisitions to ensure it remains healthfully profitable even in a potentially weak global growth environment. Acquisitions of fabricated titanium giant RTI International in 2015 and Firth Rixson, a jet-engine parts manufacturer, in 2014 allowed the company to further diversify its product line away from sole reliance on aluminum. This has added some stability to Alcoa's bottom-line, and it's making the aforementioned split possible.
Looking ahead, Alcoa is forecast to earn $0.74 for the full-year 2017, placing it at a forward P/E of just over nine. This is a cyclical value stock that investors would be wise to familiarize themselves with.
Three cheers for Prosperity
Last, but not least, value stock seekers should be sure to take a closer look at Prosperity Bancshares (NYSE:PB), a mid-cap regional bank that provides retail and commercial banking services predominantly in Texas.
The reason Prosperity Bancshares has been steamrolled since the beginning of December is its exposure to the energy industry. It should come as no surprise, given its focus on the Texas and to lesser extent Oklahoma markets, that Prosperity makes loans to exploration and production companies in the oil and gas industry. The problem is that per-barrel oil prices are down more than 70% in a year and a half, and natural gas prices aren't too far behind. There's concern that energy loan defaults could adversely affect Prosperity's bottom line.
Now, for the good news. According to Prosperity's third-quarter results released back in October, it had decreased its loan exposure to the energy industry to $405.2 million, or 4.4% of its $9.2 billion in outstanding loans. That's down from 5.3% as of Dec. 31, 2014. I'm not saying that it may not see a rise in delinquencies tied to its energy loans, so much as its better than 30% drop in a matter of weeks may be overdone considering that investors are worried about a component of its loan portfolio that makes up only 4.4%. On a side note, nonperforming assets stood at a microscopic 0.26% in Q3 2015, down one basis point from the prior-year quarter, so it's not as if there are currently any red flags.
Also keep in mind that the Federal Reserve's first interest rate hike in nearly a decade should bode well for banks. For years banks have struggled to grow because of record-low lending rates. Although the Fed has signaled that it'll be cautious with its increases, even a few additional 25-basis-point increases could make a big impact on interest-based income and net interest margins.
Valued at roughly nine times next year's projected profits, this regional bank is one for value investors to closely monitor.
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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