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.
Watch this value stock "fly"
First up this week, I'd suggest value stock investors acquaint themselves with Aircastle (NYSE:AYR), a small-cap company that purchases, sells, and leases commercial jets and aircraft around the world.
In recent months Aircastle has fallen victim to two worries. First, sinking oil prices have reduced the urgency airlines had shown when oil was at $100 per barrel to upgrade their fleets to more fuel efficient aircraft. Since upgrading a fleet can be expensive, Aircastle had been enjoying its niche spot as the cheaper middleman that could lease to airlines for a number of years at a time. Lower oil prices have removed that urgency a bit for airlines.
The other issue here is the bankruptcy of Malaysian Airlines, a customer of Aircastle, which caused it to take a $66 million charge in the third quarter, resulting in a quarterly loss of $14 million.
Yet there's a bright side here as well. For starters, while we don't like to see bankruptcies, Aircastle has a broad portfolio that serves 51 customers -- it is unlikely to be undone by this one-time charge. Without this charge, Aircastle would have generated $52 million in net income. This implies that its leasing business isn't nearly as weak as some investors might believe. Plus, even with fuel prices low, capacity expansion is the number one priority of quite a few airlines. Savings at the pump for consumers may also mean extra disposable income for vacations, which could be a boost for airlines and aircraft leasing company Aircastle.
Aircastle has also worked hard to diversify its income stream and maximize its aircraft utilization rate. In addition to lease revenue, the company can add to its bottom-line by selling aircraft for a capital gain. Through the first nine months of fiscal 2015 Aircastle boosted its net income by $38.3 million on a pre-tax basis through the sale of 20 aircraft. It also boasted a self-proclaimed utilization rate of 99.9% -- it can't really get any better than that.
Currently valued at just eight times forward earnings and paying out a dividend of 5.6%, Aircastle might be an income and value investor's dream come true.
It's been an interesting ride lately for life insurance, annuity, and pension services provider MetLife (NYSE:MET), which finds itself less than 10% away from a 52-week low.
Why such angst among investors? MetLife has been under pressure from U.S. regulators who want to label the company as a "systemically important financial institution." The SiFi tag, as it's known, would, according to MetLife, make the company far less competitive since it would impose tougher capital regulations. To boot, investors are worried about macro weakness in Asian economic growth trickling down to the consumer, and potentially slowing MetLife's overseas growth.
However, there are also strong growth opportunities for MetLife that makes its stock look like an exceptional value. For example, three weeks ago the company unveiled plans to separate into two entities. It would essentially spin-off or sell the life insurance underwriting portion of its U.S. business (this encompasses about 20% of its current net income), and maintain the life insurance services, annuities, and pension service businesses in the U.S. under the MetLife brand, along with its overseas operations. Doing so will keep the company competitive and allow it to avoid the SiFi tag from U.S. regulators. It could also help unlock value by making revenue and profit generation easier for investors to understand.
Insurers also tend to run a very safe business model that favors conservative strategies, which is often what MetLife offers. During periods of high claims payouts, insurers like MetLife rarely have any difficulty passing along higher premium costs to new customers. Thus, losses for life insurers tend to be very short-term events.
It also doesn't hurt that MetLife has delivered substantial dividend growth over the past three years, and it's now paying a yield of 3.4%, better than that of the broad-based S&P 500. Valued at less than eight times forward earnings, and with the potential for a value-unlocking break-up on the horizon, I'd encourage value investors with a low-to-moderate appetite for risk to check out MetLife.
The cure for your ills
Last, but not least, we'll take a closer look at a megacap name in the pharmaceutical industry: Novartis (NYSE:NVS).
Why have shares of Novartis cooled off of late? Nothing in particular has been directly tied to the company's business model; however, weakness in the biotechnology sector coupled with threats from Congress to clamp down on prescription drug pricing obviously has Wall Street and investors concerned. Novartis' pharmaceutical growth is dependent on pricing power, and if that gets capped the company could see its growth slow or stall.
But there are plenty of reasons to believe that investors' fears may be overblown. To begin with, the chances of prescription drug reform succeeding seems unlikely. Drug developers have threatened to pull jobs out of the U.S. if that occurs, and it could have a negative ripple effect throughout the world since profits in the U.S. help to subsidize drug delivery in other, undeveloped, parts of the world.
More importantly, Novartis completed a major transformation in 2015 that should put it on the fast track to accelerating growth. It wound up undertaking a three-part deal with GlaxoSmithKline (NYSE:GSK) that saw it sell its vaccines franchise (minus influenza) for about $7 billion, while also acquiring GlaxoSmithKline's developing small-molecule oncology drugs and product portfolio for around $16 billion. Novartis and GlaxoSmithKline also formed a joint-venture in consumer health. The deal firmed up GSK's vaccines and consumer health business, but it also provided Novartis with even greater depth in oncology, where it's among the top players. Oncology is a fast-growing therapeutic indication, making Novartis' forward P/E of 14 seem quite attractive.
Income investors are probably really liking this week's selections as well, because Novartis' dividend yield of 3.4% makes it three-for-three in terms of handily surpassing the yield of the S&P 500. If you're looking for income, value, and low volatility, perhaps your search ends with Novartis.
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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