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 NFC-me now?
This week I figured we'd begin in the technology sector, an area known more for high growth and premium valuations and not necessarily for deeply discounted value stocks. Nonetheless, I believe one does exist that offers the best of both worlds: NXP Semiconductors (NASDAQ:NXPI).
NXP Semiconductors is one of the leading manufacturers of near field communications chips. These are chips used in mobile devices, such as smartphones and tablets, that utilize electromagnetic radio fields to allow your device -- and typically a point-of-sale devices -- to essentially exchange information. In other words, near field communication, or NFC, chips could wind up revolutionizing how we pay for goods and services, clock into and out of work, or share photos and games with friends.
The issue for NXP Semiconductors of late is tied to weakness in Apple's (NASDAQ:AAPL) iPhone sales. NXP Semiconductors' NFC chips are dominant in the iPhone 6s, but Apple CEO Tim Cook cautioned investors during the company's Q1 conference call that iPhone sales in the second-quarter would face some tough comparisons relative to the previous year. Slowing adoption of the iPhone 6s has hurt pretty much all of Apple's suppliers, including NXP.
Yet there are plenty of reasons for investors to be excited about the future. For starters, we're only in the first couple of innings in the adoption of NFC technology when it comes to smartphones and point-of-sale devices for retailers. Research firm Markets and Markets predicts that the NFC market could reach $21.8 billion by 2020, with a compounded annual growth rate of 17.1%. With this much growth still expected, growth and value investors may want to take notice.
Secondly, NXP's acquisition of Freescale Semiconductor allowed it to become the fourth-largest chip-maker, and more importantly, the leading manufacturer of automotive semiconductors. A lot of investors focus on the smartphone/mobile payment capacity of NXP. Don't get me wrong, that's a very exciting growth component -- but NXP offers a diversified mix of products for the industrial sector.
Lastly, the price is right. As a sign of a true value stock, NXP is now trading at a mere nine times forward earnings, and a PEG ratio, which factors in NXP's five-year estimated growth rate of nearly 20%, of just 0.5.
The waiting (room) game
Next up: for those of you long-term investors who have a penchant for risk, we have the so-called falling knife in the healthcare sector: Community Health Systems (NYSE:CYH).
Community Health, an operator of inpatient and outpatient hospital services in more than half of all U.S. states, began the holiday-shortened week by plunging 22% following considerably weaker-than-expected earnings results. For the fourth quarter, Community Health reported an adjusted loss of $0.28 per share as admissions fell and the amount it had to set aside from bad debt provisions rose by $169 million. Comparatively, Wall Street had been looking for a $0.95 per share profit, so the results and the forecast weren't even in the same universe. For what it's worth, Community Health blamed weak admissions at its Health Management Associates (HMA) facilities, and a tamer flu season, for its subdued results.
For the time being there's no way to sugarcoat it -- these results stink! But a patient investor could find value here, with shares of the company now almost 80% below their 52-week high.
For instance, even though the Community Health purchase of HMA closed in January 2014, there are still ample cost and growth synergies likely to be realized. Both companies operate predominantly in rural areas, so they're catering to the same physician and consumer network. Integration-wise, the experience of both companies should come into play and allow the duo to save a projected $150 million to $180 million per year, as forecast when the deal was announced.
Secondly, even though Obamacare has been a bit of a mixed bag for the hospital industry, the fact that Medicaid has been expanded in 31 states, and that more than 13.5 million people have enrolled via Medicaid since mid-2013 through October 2015, bodes well for Community Health. Medicaid patients typically generate lower margins than private payers, but the hospital is looking at a guaranteed payment from government-sponsored patients. Thus, I'd be inclined to take Community Health's "excuse" of a tamer flu season to heart as an anomaly, and would expect a modest reduction in bad account provisions going forward as long as Medicaid enrollment continues to rise.
Lastly, if investors took the time to read Community Health's 8-K filing with the Securities and Exchange Commission, they'd see that its forecast isn't all that dire, even if its full-year EPS projects fell short of the Street's consensus. Full-year guidance for 2016 includes $20 billion-$20.6 billion in revenue, up from $19.4 billion in 2015, and adjusted EPS of $3.40-$3.80. Even at the low end of this guidance, Community Health is trading at a forward P/E that's just over four! With a planned spin-off of Quorum Health on the way, which will raise cash and allow Community Health to pay down some of its debt, perhaps now is the time to consider this healthcare value stock for your portfolio.
Home is where the value is
Finally, I'd encourage value investors to turn their attention to the homebuilder industry and take a deeper dive into "America's Builder," D.R. Horton (NYSE:DHI).
Like most homebuilders, D.R. Horton has been creamed lately due to concerns about U.S. economic growth. Fourth quarter U.S. GDP came in at a disappointing 0.7%, and commodity prices around the globe have mostly been sinking, stirring suspicions that a recession could be on the horizon. Although recessions are a natural part of the economic cycle, homebuilders are cyclical companies that typically don't fare well when the U.S. economy turns south.
However, there's plenty to like if you don't buy into the worries of a recession (which, mind you, have been swirling for years).
To begin with, the Federal Reserve has demonstrated a willingness to be aggressive with its monetary policy. Despite initially raising the federal funds target late last year, and forecasting four rate hikes in 2016, the U.S. Central Bank may actually wind up reversing course to boost the economy and spur inflation. Low lending rates are critical to the success of the housing industry, because they keep payments reasonable for prospective homebuyers.
Size is another advantage for D.R. Horton. In terms of market value, it's the largest publicly traded homebuilder, and it has its fingers in all parts of the country. It currently boasts a 10,665-home backlog, of which 3,526 homes come from the Southeast, 3,706 homes from the South Central U.S., and another 1,150 homes from the West. Geographic diversity allows D.R. Horton to take advantage of rising demand and prices in certain markets and regions.
We're also seeing the important metrics you'd look for in a homebuilder moving in the right direction. Home backlog rose 15% in Q1 2016 from the prior-year quarter, net sales orders jumped 12%, margins rose 0.4% to 10%, and net income jumped 11% to $157.7 million. We may not be witnessing monumental demand for new homes, but steadily low lending rates and improving home prices are doing their job and generating favorable conditions for America's Builder.
Sporting a 1.3% yield and a forward P/E of just nine, this value stock could be primed for a rebound.
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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