3 Beaten-Down Stocks Ready to Bounce Back

By Todd Campbell, Demitrios Kalogeropoulos, and Reuben Gregg Brewer Markets Fool.com

Buying beat-up stocks can be risky business. After all, there are often good reasons why these stocks have fallen out of favor with investors.

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In the case of these three stocks, however, it may be worth taking a gamble. Our contributors think catalysts at Regeneron Pharmaceuticals (NASDAQ: REGN), Royal Dutch Shell (NYSE: RDS-B), and United Parcel Service (NYSE: UPS) can get them back to their winning ways. Read on to find out if these down-and-out stocks are right for your portfolio.

Getting itself back on track

Todd Campbell (Regeneron Pharmaceuticals): Last year, sales of Praluent, a much-hyped cholesterol-busting drug, failed to grow as quickly as hoped, and worries about manufacturing led to a rejection by the U.S. Food and Drug Administration of Kevzara (sarilumab), Regeneron's highly anticipated drug for rheumatoid arthritis (RA). Those stumbles, and an ongoing patent battle with Amgen, caused Regeneron's shares to retreat from a peak north of $580 last year to current levels near $360.

The company's fortunes, however, could be about to improve, and if so, then shares could bounce back.

IMAGE SOURCE: GETTY IMAGES.

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On March 29, the FDA is scheduled to issue a go/no-go decision on Dupixent (dupilumab), an eczema drug with blockbuster sales potential. Management also plans to resubmit Kevzara's application to the FDA this quarter, potentially clearing the way for an approval in the second quarter.

Because Dupixent targets a blockbuster indication, and current treatments are falling short for many patients, it could become a top seller. Similarly, Kevzara could be a blockbuster because in trials, it outperformed the $16 billion-per-year RA drug Humira.

It's anyone's guess whether these drugs get approved and generate sales north of nine figures, but if they do, they could take a lot of attention away from Praluent's struggles. So far, Amgen has won its argument that Praluent violates its patents; if Regeneron loses on appeal, Praluent could be removed from the market, or Regeneron may need to pay costly royalties to Amgen.

Nevertheless, because Regeneron already markets the $5 billion vision-restoring drug Eylea, approvals for Dupixent and Kevzara could mean it exits 2017 with three blockbuster drugs on the market. I think that opportunity could allow investors to claw back some of their losses.

An oil giant's big bet

Reuben Gregg Brewer (Royal Dutch Shell): International oil giant Royal Dutch Shell doubled down on liquefied natural gas during the oil downturn, spending over $50 billion to acquire BG Group. This loaded the company up with debt just when its top and bottom lines were getting hit hard by falling oil prices. At the end of 2016 debt stood at nearly $83 billion (around 30% of the capital structure), up about 50% year over year. Shell is now starting to dig itself out of its debt hole by selling non-core assets.

This is a big deal for Shell and its shareholders, and it's just the beginning of the process. However, once the dispositions are complete, the oil major will have overhauled its business for a future that will likely feature a more prominent role for natural gas. And Shell will be one of the biggest players in the space.

Here's the thing. The big question isn't whether the company, which traces its history back to 1833, can remain solvent; the question is how long the process of trimming debt will take. And that sets up a turnaround opportunity for this 6.5%-yielding stock, when many of its most prominent competitors yield 4% or less. Now that the sales process is underway, Shell could start bouncing back sooner than some expect, with every sale strengthening the company financially and making its dividend more secure.

This stock could deliver big gains

Demitri Kalogeropoulos (United Parcel Service): Package-delivery giant UPS is trailing both the market and its main rival FedEx by a wide margin over the last one-year and five-year time frames. The stock is in negative territory so far this year, too.

That seems like an overreaction on the part of some investors. After all, UPS managed accelerating sales growth over the holiday quarter with no major service disruptions. Given that package volumes spiked higher by 5% to almost 20 million units per day, recent investments in strengthening the delivery infrastructure are clearly helping handle the flood of e-commerce-powered growth.

Sure, profitability is trending lower, but that has a lot to do with ramped-up spending on important initiatives like automation. Over the short term, these shifts are putting pressure on earnings growth, but they're likely to pay off over time by increasing efficiency, reliability, and delivery speed.

Like FedEx, UPS is planning to spend even more cash on the business this year, and the prospect for further margin compression has investors worried. But there's plenty of good news on the way, too, including higher prices in the U.S., booming growth in the international segment, and the potential for improved network efficiencies. While they wait for these gains to ideally speed profit growth back up, patient investors can collect a well-covered dividend that, at a 2.9% yield, is roughly three times FedEx's payout.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. Reuben Brewer has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service. The Motley Fool has a disclosure policy.