While many companies are rising past their fair values, others are trading at potential bargain prices. Although many investors would rather have nothing to do with stocks wallowing at 52-week lows, it makes sense to see 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.
Lights. Camera. Action!
Animated movie producer DreamWorks Animation (NASDAQ:DWA) may be pumping out films for the general audience, but there have certainly been some very gory, PG-13 earnings misses over the past couple of quarters.
DreamWorks' plan of attack had been to boost its staff and invest heavily in new technology in order to release three movies a year. But as CEO Jeffrey Katzenberg recently opined, that decision may have been a bit hasty.
DreamWorks announced last week its intention to cut its production down to just two films per year. Additionally, it will lay off around 500 employees, or about 18% of its workforce in an effort to cut expenses. DreamWorks is already in the process of reducing its per-movie cost to approximately $120 million (not counting marketing), but that's a figure not expected to be hit until later in 2016. The end result is steep losses stemming from a number of underperforming film releases.
While there's little denying that Katzenberg and DreamWorks have taken a spanking recently, it's also hard to deny that prior to the past few years DreamWorks was essentially a star in animated films. When I visited DreamWorks in 2013 I noted that DreamWorks had four of the top 50 grossing animated films of all time, yet it had only produced 25 films in total at the time of my visit. This isn't just luck at play here. DreamWorks has a talented team, and scaling back production, while perhaps not what Wall Street wants to hear, is a really smart move considering its success when it produced one or two films per year.
DreamWorks' film pipeline isn't static, either. The Kung Fu Panda series and Madagascar have been successes for DreamWorks, and the current pipeline shows sequels for both in the somewhat near future. Don't overlook How to Train Your Dragon 3, either, which should be released sometime in 2017. Obviously DreamWorks needs a handful of new blockbusters with which to secure a new generation of animated film watchers, but there's nothing wrong with relying on what should be a nice safety valve in these franchises.
If this turnaround takes hold, as I believe it will, then DreamWorks would be valued at just 13 times Wall Street's 2016 profit projections, which I consider a pretty fair value considering its generally favorable history of producing winners.
Returns you can bank on
I had to do a double-take on this one since I've been accustomed to wild bank share price volatility, but after a relatively tight trading range over the previous year for Bank of America (NYSE:BAC), arguably America's least favorite bank and the current best-performing stock in my personal portfolio, it's trading very near a 52-week low following its weaker-than-expected, fourth-quarter results.
For the quarter, Bank of America reported a wide revenue miss of just $19 billion, down from $21.7 billion in Q4 2013, and a nearly 10% decline in net income to $3.1 billion. Primarily at fault was the lowest net interest margin that Bank of America has reported in a decade at 2.18%. This was down 26 basis points from the year-ago period, and signals what a difficult environment it currently is for banks to make healthy profits.
Yet I continue to see plenty to be excited about.
This recent quarter didn't include the millions, or should I say billions of dollars in legal charges and fees that we've become accustomed to. Having paid out more than $60 billion in legal settlements since the recession, I'd like to think that Bank of America has almost completely put the mortgage bubble in the rearview mirror.
The company's credit quality is also showing signs of improvement. Its provision for credit losses fell by more than a third in the fourth quarter to $219 million, representing the lowest charge-off ratio in a decade. This implies that Bank of America's remaining loans should continue to deliver somewhat predictable income. Not to mention that non-interest expenses fell more than $3 billion year over year to their lowest level in more than five years.
Investors should keep in mind that it's only a matter of time before interest rates once again start climbing. Once this happens, Bank of America and its peers should see their profits climb, especially when taking into account the higher quality of loans on their books and the amount of deposit growth most banks, including Bank of America, have observed.
At only 11 times forward earnings and finally yielding in excess of 1%, I have no intentions of selling my shares of this value stock any time soon.
It's a Wynn-win scenario
Lastly, I'd suggest taking a closer look at casino and resorts giant Wynn Resorts (NASDAQ:WYNN) as a value stock whose fortunes could be turning around soon.
Shares of Wynn Resorts have lost more than $100 per share since peaking near $250 last March. What's to blame? Primarily it's been a weak performance in Macau, which should be growing at a much faster pace than Wynn's Las Vegas operations. Unfortunately, the two have reversed roles. In the third quarter, Wynn reported a healthy 9% expansion in Las Vegas revenue, but a 5.6% decline in Macau revenue. Specifically, Wynn noted that VIP table game turnover was down by 17.4%.
Yet I'd suggest that this swoon is only temporary. As my Foolish colleague Travis Hoium pointed out recently, Wynn is in the process of building the Wynn Palace in Cotai, the quickest growing region of Macau. Travis believes the Wynn Palace, which will rival the size of the Bellagio in Las Vegas, could double Wynn's revenue and profits after it opens.
We should also consider that as Wynn diversifies its offerings toward a slightly more mainstream audience -- as evidenced by the 36.4% increase in table game wins in the mass market segment in Q3 2014 -- it should see substantial benefits in regions like Macau. China's middle class is growing like wildfire, and they're looking for their first tastes of luxury. If Wynn can cater to this group without alienating its VIP spenders then it should be in great shape.
Wynn is also known for taking care of its shareholders. The company is currently paying out $6 on an annual basis in dividends, and has been known to hand out special dividends on top of its $6 per year from time to time. All told, shareholders are walking away with a 4% yield, and I foresee a forward P/E in 2017, after the Wynn Palace opens, of between 10 and 12 based on its current share price.
Pardon the pun, but I view a long-term investment here to be a Wynn-win scenario!
Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. His secret Vegas vice is hitting the roulette tables at Caesars Palace. 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 Bank of America. It also recommends DreamWorks Animation. 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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