While many companies are risingpast 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.
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Here's a look at three fallen angels trading near their 52-week lows that could be worth buying.
Drilling deep for value
Surprise! The very first company we're going to take a closer look at this week has been hammered by weak oil prices and a tempered global outlook for energy demand. Nonetheless, I suspect Oceaneering International is a company that value stock investors are going to want to have on their radar.
Source: Oceaneering International.
Oceaneering International operates in two primary segments. It provides remotely operated vehicles, or ROVs, which drillers operate from the surface to aid in offshore drilling preparation and maintenance, and it also provides subsea services that includes hardware installation and servicing. A reduction in total active rigs due to weaker oil prices is obviously not good news for a company reliant on offshore and deepwater drilling for contracts.
But, there's a lot to like as well. For example, in 2014 Oceaneering International spent $1.1 billion in capital, of which $700 million went to investors. Of this $700 million, $110 million was paid out in the form of a dividend, while the remaining $590 million went toward the repurchase of 8.9 million shares. Fewer shares outstanding can boost EPS and make a stock appear cheaper, potentially pushing its share price higher. Additionally, only $40 million went toward acquisitions, so Oceaneering International is planning on growing the old-fashioned way: organically!
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Second, in spite of currently tough conditions let's consider how exceptionally this company has been run by its current management team. ROV operating income has increased in 11 consecutive years, operating margin in 2014 rose 100 basis points to 30% as one-time costs from the prior year were excluded, and it's projecting "at least $725 million of EBITDA in 2015." In short, times are tough for contract servicers, but Oceaneering International has a number of cost controls already in place and is expected to remain healthfully profitable and efficient.
Source: Oceaneering International.
Finally, it offers products in an industry with few competitors and a high barrier to entry. Drillers aren't going to be able to just walk down the street and find a ROV supplier, which places Oceaneering International in an advantageous position over the long run when it comes to demand and pricing. Chances are good that as emerging market nations become more industrialized they'll demand more oil, further boosting demand for ROVs and increasing Oceaneering's profitability.
Based on its forward P/E of 15 and its current dividend yield which has crept over 2%, Oceaneering International could be a nice find for value investors.
A "golden" opportunity
This next selection is an interesting one as it looks to take advantage of one of the most visible long-term trends you'll find: the increasing need for senior housing and healthcare facilities to care for our nation's growing population of elderly individuals.
The company in question is Senior Housing Properties Trust , and it's actually a real estate investment trust that focuses on buying medical buildings, such as hospitals, senior apartments, nursing homes, and independent living properties .It earns its keep by renting or leasing these properties.
Source: Fllckr user PJ Johnson.
Think about this scenario for a moment: We have baby boomers which began retiring less than a decade ago combined with the Centers for Disease Control and Prevention reporting that life expectancy in the United States hit a new high of 78 years. People are living longer, meaning the expected population of elderly individuals is going to explode higher in the coming two decades.
The elderly are responsible for a good chunk of the healthcare expenses and needs in the U.S., and Senior Housing Properties is well aware of this. Thus, owning a portfolio with nearly 200 primarily medical properties should give it ample rental pricing and lease-negotiating power that ensures its net operating income from its properties only rises. In the third-quarter, reported in November, the trust noted that 95.6% of its medical office building square footage was leased compared to 95% in the year-ago period, while occupancy at managed senior living communities rose 60 basis points to 88.2% from the year-ago quarter.
Also, it's worth noting that as a REIT Senior Housing Properties Trust is required to pay out a minimum of 90% of its profits to shareholders in the form of a dividend in order to avoid corporate tax rates.
The end result is a REIT with a nearly 7% yield and a forward P/E of 12. With little in the way of expected volatility, Senior Housing Properties Trust is a value stock hunters' possible dream come true.
Slow and steady wins the race
Finally, I'd suggest value stock investors once again stop shying away from the mortgage real estate investment trust, or mREIT, sector and give Invesco Mortgage Capital a deeper dive.
Invesco Mortgage Capital's asset portfolio is primarily filled with mortgage-backed securities, but it also has ways of earning interest from residential and commercial loans. Additionally, a majority of its portfolio is based on agency loans, or loans backed by the U.S. government, although its third-quarter report did list $3.8 billion of $18.6 billion as being non-agency holdings.
Source: Myfuture.com via Flickr.
The dangers of mREITs are threefold. First, they often dilute shareholders to generate cash to make MBS purchases. For investors it means very subdued share price gains. Secondly, rising interest rates can play havoc on their margins. Since REITs pay out most of their profits as a dividend, a rising interest rate environment can rapidly cut dividends in the mREIT sector. Lastly, in the case of Invesco, non-agency loans can leave a company exposed to losses if the housing market were to rapidly turn sour.
In spite of these concerns, I believe Invesco is worth the look. It's been rebalancing its portfolio in favor of safer agency loans, while also reducing its leverage. This should make it more nimble when interest rates do begin to rise. Not to mention, as my Foolish colleague Dave Koppenheffer pointed out in September, Invesco's non-agency loans are generally high credit quality and quite diverse. So while they can default, which would be bad news for Invesco, the chances of them defaulting are actually pretty low.
Also, we have to take into account that Wall Street may be completely overreacting to the long-awaited federal funds rate hike from the Federal Reserve. I don't believe the Fed has any intentions of targeting anything higher than a 2% rate through 2017-2018. Historically, mREITs do see their net interest margins tighten as rates rise, but their dividend yields continue to outpace the S&P 500 by a substantial amount. While it may be difficult for Invesco to uphold an 11% dividend yield, keeping its payout above 8% does seem reasonable. Reinvesting your dividend payout at 8% will double your investment in less than nine years.
Invesco is definitely riskier than Senior Housing Properties, but more risk tolerant value and income investors would be wise to give it a closer look.
The article 3 Value Stocks Near 52-Week Lows Worth Buying originally appeared on Fool.com.
Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool recommends Oceaneering International. 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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