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.
A healthy dose of growth and value
We'll begin this week by looking at a company in the healthcare space that's completely fallen off the wagon since last April: Perrigo (NYSE:PRGO).
Perrigo, a provider of consumer healthcare products, branded healthcare products, and prescription drugs, has been walloped over the past 10 months for two primary reasons. First, generic drugmaker Mylan (NASDAQ:MYL) failed in its attempt to acquire Perrigo for $26 billion. After Perrigo's board rejected the buyout offer, Mylan took its proposal to shareholders. Unfortunately for Mylan, not enough Perrigo shareholders were willing to tender their shares. With this buyout premium removed, Perrigo shares fell.
The other issue has been the underperformance of Perrigo's branded consumer healthcare, or BCH, segment. Its $3.1 billion acquisition of Omega Pharma was expected to broaden and quickly grow its over-the-counter portfolio, but weaker-than-expected growth and a $185 impairment charge tied to its Omega Pharma deal aren't helping.
Nonetheless, there are reasons to be excited about Perrigo's reduced share price. For starters, these acquisitions have created a well-diversified OTC and prescription pharmaceuticals' company that's capable of growth in just about any market environment. Even with a tepid flu season in Europe constraining BCH sales, Perrigo's consumer healthcare and prescription sales both hit all-time records for fiscal 2015. It's also worth noting that the problems its BCH division is facing are likely short term in nature.
Another key point is that Perrigo is based in Ireland, and as such, it pays some of the lowest corporate tax rates in the world. That's good news for Perrigo since it's dealing with OTC and consumer healthcare products that tend to have tighter margins than, say, its drug-making peers that focus more on higher-margin prescription products. This low tax rate -- projected at 14% in fiscal 2016 -- helps Perrigo keep more of its profits, allowing it reinvest back into its business.
Even with its reduced outlook, the company is now valued at roughly 13 times its 2016 EPS estimates, and it's probably capable of high-single-digit percentage EPS growth throughout the remainder of the decade. Tack on its potential to attract a buyer given its tax-advantaged status, and I believe we have a strong case to consider buying this value stock.
This decoupling could be your opportunity
Sometimes we as investors need to take a step back and determine whether an issue with a business is temporary or if it's a thesis-altering event. My suspicion is the latest shoe to drop with railroad car manufacturer and leasing company Trinity Industries (NYSE:TRN) is the former, not the latter.
Last week, Trinity announced its fourth-quarter results and supplied its fiscal 2016 guidance. Although its $1.30 in EPS for Q4 (a 51% increase) topped estimates while its revenue of $1.55 billion missed the mark by $60 million, it was the company's weak guidance that caused its shares to decouple. Looking ahead, Trinity forecast full-year EPS of $2 to $2.40 in fiscal 2016, well below the $3.65 estimate Wall Street had been expecting. Furthermore, it projects a 20% decline in expected volumes for its rail group.
There's no masking what's going to be a challenging year for Trinity, but there's no reason for investors to panic, either.
To begin with, Trinity isn't a one-trick pony and has multiple avenues and levers it can pull to generate cash and reduce expenses. For instance, leasing may not offer the same robust margins and railcar deliveries, but it's a smart way for Trinity to generate cash flow when the overall railcar market is weak. It also has the ability to reduce its workforce and improve operating efficiencies. It's approved a $250 million share repurchase program that should help boost EPS in combination with cost-saving reductions.
Trinity's backlog is an additional source of strength. Rail group backlog stood at $5.4 billion, or nearly 49,000 railcars, by the end of fiscal 2015. Although that's down from the sequential quarter, the backlog extends well into 2020. This gives the long-term investor more than ample time to allow for Trinity to adjust its production to meet demand and lower its costs.
Despite its reduced outlook, Trinity Industries is valued at just 7.5 times this year's diluted EPS based on the midpoint of its guidance. With profitability and cash flow still strong and $2.1 billion in cash, marketable securities, and credit at the company's disposable, this could be an intriguing value stock worth considering.
Putting your best foot forward
Finally, I'd encourage value investors to keep a close eye on apparel retailer Gildan Activewear (NYSE:GIL), which manufactures T-shirts and sports shirts, but is perhaps best known for being a giant in the sock industry.
The biggest issue for Gildan during 2015 was its streak of three consecutive quarters of EPS declines (which ended with its third-quarter report). Gildan blamed lower prices for its Printwear, which ultimately hurt its margins, and manufacturing transitions for new retail programs, for its weakness. It is worth pointing out that fashion and consumer buying habits do change rapidly in retail, so downturns like this aren't completely uncommon among apparel companies.
The good news is that Gildan's downturn looks to be temporary, supplying investors with a possibly attractive buying opportunity.
One factor working in Gildan's favor is that we're seeing commodity prices down almost across the board. Even though falling commodity prices can translate to lower economic growth and it can create a more cost-conscious consumer, companies like Gildan are benefiting from lower input and transport costs for its goods. In effect, global weakness may wind up boosting margins for Gildan.
Consumers' normally insatiable desire for branded-name apparel is another selling point. It holds the U.S. sock license for the highly popular Under Armour and New Balance, and boasts company-owned brands Gildan and Gold Toe. Consumers trust brand-name products at a good price, and this should work in Gildan's favor.
Lastly, Gildan is one of a handful of apparel makers that allow investors to take advantage of the activewear market. Just as we witnessed the organic food craze hit grocers and restaurants in the 2000s, we're witnessing fairly steady active apparel growth this decade. Buying Gildan allows investors to participate in this trend.
Valued at just 14 times next year's projected profit, Gildan could be a value stock worth looking into.
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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