Just as we often examine companies that may be rising past their fair values, we can also find companies trading at what may be bargain prices. While many investors would rather have nothing to do with stocks wallowing at 52-week lows, I think it makes a lot of sense to determine whether the market has overreacted to a company's bad news, just as we often do when the market reacts to good news.
Here's a look at three fallen angels trading near their 52-week lows that could be worth buying.
The power to succeed
At the moment, all prospectuses for oil and gas companies should come with directions on how to stop, drop, and roll, because investors have been burned badly over the past month and a half. Oil prices have hit a four-year low on a mixture of global growth concerns and sustained Saudi oil output. The result is oil and gas drillers like Chesapeake Energy (NYSE:CHK) have been clobbered.
Of course, Chesapeake had a number of its own unique issues long before oil prices took a bear market-styled dive off a cliff. Chesapeake, for example, was highly levered and had to sell off some of its non-core assets in order to pay for its capital expenditures in future years. Furthermore, former CEO Aubrey McClendon brought with him a cloud of fiduciary concern, as we've discussed in the past.
The good news is, McClendon is no longer running the ship, and this sell-off could be the perfect time for long-term value investors to give Chesapeake a closer look.
Admittedly, Chesapeake has pushed away from natural gas and moved heavily into liquids production over the past two years. Oil traditionally has better margins and tends to be less volatile than natural gas (though, tell that to today's investors), so the move made sense for Chesapeake at the time. Still, even with oil prices down, Chesapeake has a lot going for it, with its Utica shale cash flow growth expected to triple this year, and production increasing at a rapid rate while costs tumble with its Haynesville shale assets.
Chesapeake has successfully reduced its capital spending from greater than $14 billion in 2012 to a projected $5 billion to $5.4 billion in 2014, all while increasing the midpoint of its 2014 production outlook by 10,000 barrels of oil equivalent per day per its second-quarter results, released in August. Chesapeake is successfully bringing new wells online despite lower net realized prices.
Also, the company has made a huge dent in its one-time worrisome debt balance. Chesapeake has reduced its GAAP debt by 7% since 2012 and has managed a 27% reduction in net leverage, partly due to lower costs and better margins, as well as from the sale of non-core assets.
Long story short, with a forward P/E now hovering below nine and a close to 2% yield, I'd suggest now would be the time to consider this energy stalwart as a potentially attractive buy.
Speaking of rough months, Ford (NYSE:F) investors are probably ready to switch to a DeLorean if they could get it up to 88 mph and head back to August a la Doc Brown from Back to the Future. Unfortunately, the modern day flux capacitor has yet to be invented, and the reality is, Ford shares have sunk notably over the past month.
In a late September conference call, Ford CEO Mark Fields announced that his company was only on pace to deliver $6 billion in net income instead of its prior forecast of $7 billion to $8 billion for the year. Higher-than-expected losses in Europe and high recall costs were to blame for the weakened profit outlook.Dampening the mood further was a 0.2% year-over-year monthly sales decline in China -- a market where strong double-digit growth has become the norm.
Skeptics are obviously hitting the brakes, here, but I'm ready to burn some rubber, metaphorically speaking, with this value stock.
First, I'd strongly advise against the China slowdown worrying investors. Remember that Ford has been consistently gaining market share in the country, and it's poised to introduce a number of new vehicles in the region, which should once again drive sales forward. Ford's sales slowdown could very well be nothing more than consumers waiting for Ford's newly promised models.
Secondly, don't forget that while auto recalls are unpleasant and costly, they're a short-term issue. If Ford has one thing going for it even now, it's that year-in and year-out, it's been the top automaker for brand loyalty. Ford has done a good job of mixing economy prices with either spacious interiors and/or under-the-hood power to satisfy just about any consumer.
Finally, Ford is just dirt cheap on a valuation basis. Even after the reduced earnings forecast, Ford is trading at a mere eight times forward earnings, a PEG ratio of around one, and its dividend, which is at its highest point since 2001, is approaching a 4% yield. In other words, even if you wait a few quarters for Ford to get past its recalls, and for China's consumers to come around to Ford's new models, you'll net nearly 4% in the meantime.
I certainly see no reason to stop short with Ford shares where they are right now.
One powerful pipeline
For this week's last value stock selection, I'm going to stretch the traditional meaning of a value stock into the predominantly clinical stage biotechnology arena and show you why I believe ImmunoGen (NASDAQ:IMGN) could be an investment you'll grow to love.
"Why is ImmunoGen at a 52-week low?" you wonder. First, ImmunoGen is losing money since it has just one drug approved by the Food and Drug Administration. With the market in freefall the past few sessions, investors have severely shied away from riskier investments, which include companies whose valuations are based largely on their drug development pipeline. Also, ImmunoGen announced last November that IMGN901 in combination with etoposide and carboplatin failed as a midstage treatment for small-cell lung cancer. This had been ImmunoGen's most developed in-house drug.
In spite of these concerns, I believe ImmunoGen has a bright future, and it all starts with its pipeline, which is where I see plenty of value.
In total, ImmunoGen has 23 compounds currently being studied in slightly more than two dozen indications. Considering the company's sub-$800 million market value as of this writing, Wall Street is giving very little credence to the company's proprietary antibody-drug conjugate technology, which I believe is a big mistake on the Street's part. It would only take the success of perhaps two of these 23 drugs to really vault ImmunoGen higher, or perhaps put it on the radar of one of its seven partners as a buyout candidate.
Another consideration here is that Kadcyla is likely, at least in my personal opinion, to gain additional indications beyond the second-line HER2-positive metastatic breast cancer indications it's currently approved to treat. The more important first-line indication, should everything work out, could more than double sales of Kadcyla. Keep in mind that Roche (NASDAQOTH:RHHBY) does receive the lion's share of revenue, but each approval moves ImmunoGen one step closer to profitability -- and proves to other big pharmas that its drug delivery mechanism works to fight cancer.
With a deep pipeline, plenty of high-profile partners, and the ability to generate cash via licensing deals, I believe there's a lot to like with this non-traditional value stock.
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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