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3 Value Stocks Near 52-Week Lows Worth Buying

By Sean Williams - Mar 8, 2016 at 8:41AM

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These three value stocks may be down, but they're far from out.

Image source: Pixabay.

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.

The 800-pound gorilla in biotech
Sometimes it's just too hard to ignore the 800-pound gorilla in the room, which is why I'd suggest value investors take note of biotech blue-chip Gilead Sciences (GILD 4.17%).

Image source: Gilead Sciences.

Gilead has taken heat over the past year for a number of reasons. First, new competition is emerging in hepatitis C (HCV) and HIV. The approval of Merck's Zepatier for HCV, and the success of ViiV Healthcare's Triumeq, has some investors clearly concerned that Gilead's best days are already in the rearview mirror. There are also concerns about prescription drug reform that haven't yet died down. Gilead is one of a handful of poster children for inflated drug prices, with its HCV pills Sovaldi and Harvoni running $1,000 and $1,125, respectively, per pill.

These concerns aside, there appears to be little to fear if you're a Gilead Sciences shareholder.

To begin with, Gilead's dominance in HCV should continue since it's the clear convenience leader. AbbVie's Viekira Pak can require up to six pills per day (although AbbVie hopes to soon have a single-pill formulation on the market), while some Zepatier patients may need to take ribavirin, which has been shown to cause anemia and rashes. By contrast, Harvoni is a once-daily pill and nothing more for Gilead's genotype 1 HCV patients. Since it maintains overwhelmingly dominant market share in HCV, physicians and consumers also trust the product. It seems likely Harvoni and Sovaldi will continue to contribute $18 billion to $20 billion in annual sales.

Image source: Gilead Sciences.

A next-generation formulation in HIV known as Genvoya could also help Gilead counter Triumeq's market share gains. Genvoya is a once-daily pill with a new form for tenofovir, which is designed to provide for lower levels of the drug within the bloodstream, but higher concentrations within cells where HIV-1 replicates. This specialization could quickly make Genvoya a blockbuster.

As an addendum, you can't forget about Gilead's deep pipeline that's looking into other serious and unmet liver diseases, such as hepatitis B and nonalcoholic steatohepatitis, as well as its developing line of oncology products.

Valued at just seven times forward earnings and sporting a dividend yield of 2%, Gilead is a rare breed of value stock in the healthcare sector.

Ohio River value
Next up, we'll move from the realm of mega-cap stocks to a small-cap banking chain operating in the Ohio River Valley: First Merchants (FRME 0.95%).

Like most banks, regardless of whether they're national or regional, First Merchants has come under pressure in recent months following concerns of a U.S. and/or global slowdown. First Merchants is centralized around Chicago, Indianapolis, and Columbus, three sizable cities that would certainly feel the impact if we see an industrial recession. Slowing growth could also halt the Federal Reserve's plans to raise interest rates further. Since 73% of revenue was interest-based in the fourth quarter, inaction from the Fed sort of takes the wind out of First Merchants' sails.

Nonetheless, there are a handful of reasons value investors may want this regional bank on their radar.

Image source: via Flickr.

In First Merchants, we have a company capable of simultaneous double-digit organic and inorganic loan growth. For example, at the end of fiscal 2015, First Merchants' loan portfolio totaled $4.7 billion, a nearly 20% increase from the end of the prior year. Organic growth accounted for 11% of the surge, or $430 million, while acquisitions, of which First Merchants made two (Cooper State Bank and Ameriana Bank), accounted for 9%, or $339 million. Having multiple pathways to growth gives First Merchants flexibility its peers may not have.

Secondly, First Merchants' balance sheet is in pretty good shape. Its non-performing assets and 90-day delinquencies declined from $74.7 million in 2014 to $51.5 million as of the end of 2015 (and this included both acquisitions). Combine this with expected cost-savings from its two acquisitions, and it's possible First Merchants' core metrics will improve from their current levels.

The company has also been reinvesting in its online banking platform and mobile app in an effort to reach millennials who are likely to be the driving force for banks over the next decade.

A forward P/E of 11, coupled with a nearly 2% dividend yield and a successful organic and inorganic growth strategy, makes this a value stock worth eyeing.

A true "long-term" outlook
Finally, we'll turn our attention to the services sector and take a gander at why Matthews International (MATW 0.41%) is a value stock that should be considered for the long term.

Matthews itself is really a hodgepodge of three separate operating entities. It has a memorialization and casket segment that, until recently, made up the largest chunk of its revenue; a brand solutions business which is now its largest revenue driver; and an industrial segment. Like First Merchants above, slowing U.S. and global growth is often perceived as bad news for brand solutions businesses, and it's the main reason Matthews International shares have been under pressure of late.

The good news is there are plenty of reasons to believe a rebound is imminent.

Image source: Pixabay.

For starters, there simply aren't many companies that offer the variety of memorization products Matthews can, which means it's in an advantageous position when it comes to pricing and meeting customer needs. More importantly, a growing population means the likelihood of a growing need for memorialization plagues and caskets over the long run.

The merger between Matthews International and SGK Brand Solutions is also still playing out. Even though it's been two years since the buyout was announced, it's important to note that the integration of both brand solutions businesses hasn't happened overnight. Cost synergies are still expected, and SGK's focus on Asia and the U.S. should help diversify Matthews' brand solutions business away from its reliance on Europe. 

Lastly, and this is more of a near-term benefactor, lower commodity costs are benefiting the company's casket, memorialization, and industrial segments. Combined with cost synergies from its recent purchase of Aurora Casket Company and SGK Brand Solutions, Matthews could deliver some surprising margin expansion in the coming quarters.

Currently trading at 13 times forward earnings, Matthews appears well-deserving of your attention.

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.

The Motley Fool owns shares of and recommends Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
$65.58 (4.17%) $2.62
Matthews International Corporation Stock Quote
Matthews International Corporation
$26.69 (0.41%) $0.11
First Merchants Corporation Stock Quote
First Merchants Corporation
$43.40 (0.95%) $0.41
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
$90.27 (-0.82%) $0.75
AbbVie Inc. Stock Quote
AbbVie Inc.
$140.77 (-1.28%) $-1.83

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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