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 near their 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.
Banking on a rebound
We'll begin the week by taking a closer look at banking giant Wells Fargo (WFC -1.55%), which over the past couple of weeks has been admonished by Wall Street and lawmakers for certain banking practices that have come to light.
Roughly four weeks ago Wells Fargo announced that it would be paying a $185 million fine to the Consumer Financial Protection Bureau after it was discovered that 5,300 now-former employees at the bank had opened more than 2 million unauthorized accounts. Wells Fargo relies on cross-selling within its branches, but it would appear that quite a few employees took the actions too far. Adding fuel to the fire, CEO John Stumpf skirted accepting responsibility when testifying in front of lawmakers on Capitol Hill. It's possible there could be additional near-term fallout from this PR nightmare for Wells Fargo.
Though this is far from ideal news, it's not thesis-altering, nor will it weigh on Wells Fargo's long-term growth strategy. Thus, in my opinion, it provides the perfect opportunity to go shopping for a megabank value stock.
Wells Fargo's bread and butter is, and will continue to be, deposit and loan growth. It's generally avoided the riskiest investment channels, such as derivatives investing, which wound up wrecking the balance sheets of a number of its peers. During the second quarter, Wells Fargo announced that total deposits grew by 4%, or $51.4 billion, to $1.2 trillion, while total average loan growth expanded 9%, or $80.3 billion, to $950.8 billion. The outperformance in its loan portfolio shouldn't be surprising with near-record-low lending rates extending into almost their eighth year. Net charge-offs, even with exposure to energy losses, amounted to a reasonably low 0.39% in Q2.
The prospect of interest rate normalization sometime in the intermediate future is another potential growth driver. As the U.S. economy finds its footing, the Federal Reserve is expected to respond by increasing its federal funds target rate. This will impact yields by pushing them higher, which in turn puts substantially more money into the pockets of banks. A 100 basis point increase in short- and long-term interest rates could mean a couple billion dollars in added interest income for Wells Fargo.
Lastly, keep in mind that consumers have a pretty short memory span when it comes to PR flubs. If Bank of America can put its numerous PR issues in the rearview mirror, so can Wells Fargo.
Valued at less than 11 times next year's full-year EPS, and divvying out a 3.5% yield, Wells Fargo looks ripe for the picking.
Generic returns never looked so attractive
Another intriguing large-cap company that could be worth a closer look by value investors is Israeli-based Teva Pharmaceutical (TEVA -0.23%).
Teva's recent woes can be traced to two issues. First, the company has been staving off the introduction of generic Copaxone, its blockbuster multiple sclerosis treatment, for years. At one time Copaxone made up well over 20% of Teva's annual sales, and there's been genuine concern on Wall Street that generic competition could quickly chip away at Teva's near-term growth rate.
The other issue for Teva is its recently completed acquisition of generic drug division Actavis from Allergan (AGN) for $40.5 billion in cash and stock. The combination was delayed as Teva struggled to win over regulators who had opposed certain aspects of the deal on the grounds that Teva was creating a generic-drug giant at the expense of competition. Needless to say, Wall Street is concerned that this deal won't pay immediate dividends, or provide any near-term clarity, for Teva.
However, these concerns aside, long-term value investors have plenty of reasons to be excited.
We can begin with the acquisition of Actavis. Even though Teva has been required to sell assets in order to appease regulators -- Teva announced on Wednesday that it has agreed to sell its generic business in the U.K. and Ireland to India's Intas Pharmaceuticals for $769 million-- the deal is transformative for Teva. Becoming the largest generic drug developer in the world should allow for improved pricing power, which, when combined with cost synergies, could vastly improve Teva's operating margins. Further, IMS Institute for Healthcare Informatics is estimating that generic scripts written will rise from 88% in 2015 to between 91% and 92% by 2020. The long-term trends favor success for Teva's generic business.
Adding fuel to the fire, Teva was able to use legal means to stay the entrance of generic Copaxone long enough to introduce a newly formulated extended release version of Copaxone. This new, more convenient, formulation could allow Teva to transfer longtime Copaxone users over to the extended-release version, thus losing far less in sales than expected once generic Copaxone enters the marketplace.
Currently valued at less than eight times Wall Street's fiscal 2017 EPS consensus and paying out a 2.6% yield, Teva is looking quite delectable.
This is a foundational value stock
We'll end the week by taking a closer look at AvalonBay Communities (AVB 1.69%), a residential real estate investment trust that owns 283 apartment communities containing just shy of 83,000 apartment homes in 10 states.
AvalonBay has contended with two concerns in particular over the past couple of months. First, the Federal Reserve's inaction with interest rates has sunk AvalonBay's share price. Higher interest rates make consumers think twice about taking out a mortgage and buying a home, therefore having the Fed stand pat on interest rates keeps the ball in renters' courts as opposed to AvalonBay's.
The other issue is AvalonBay's funds from operations (FFO) decline during the second quarter. Diluted FFO fell 9% from the prior year to $1.99, mainly on account on losses from debt extinguishment.
While there's no denying these concerns, AvalonBay could still be a foundational value stock for long-term investors for a couple of reasons.
To begin with, AvalonBay is primed to benefit in much the same way Wells Fargo is when interest rates normalize. As described above, when rates move higher, consumers may choose to forgo buying a home and continue renting. This essentially locks consumers into the renting cycle, growing rental demand and favoring AvalonBay's pricing power. As it is, AvalonBay announced a 5.2% increase in year-over-year average rental rates in Q2, so you can just imagine how quickly rental rates could expand once the federal funds target rises 100 or 150 basis points.
AvalonBay also benefits from its target customer. AvalonBay's communities tend to target middle-to-upper-income individuals and families, which means its renters tend to be far more resilient to economic fluctuations. Whereas some of AvalonBay's peers could struggle mightily during a recession, many of its own renters should be expected to remain financially sound.
Even AvalonBay's Q2 earnings report isn't a real reason to fret. Extinguishing debt should be cheered by investors, and the company's core FFO, excluding this debt extinguishment loss, actually rose modestly on a year-over-year basis.
With the potential to grow its FFO by a mid-to-high single-digit percentage for the foreseeable future, and a 3% yield, AvalonBay Communities could be the value stock that puts a roof over your portfolio's head.