3 Beaten Down Stocks Ready to Bounce Back

By George Budwell, Chuck Saletta, and Neha Chamaria Markets Fool.com

Stocks that have lost a large chunk of their value over a short period of time can sometimes represent tremendous bargains. That said, beaten down stocks also have the potential to be extremely dangerous value traps.

Continue Reading Below

With this stark dichotomy in mind, we asked three of our contributors which downtrodden stocks they think may be worth looking into right now. They recommendedDynavaxTechnologies Corporation (NASDAQ: DVAX),Silver Wheaton Corp. (TSX: SLW), andDHI Group (NYSE: DHX).Below, they outline their reasoning and discuss why the market might start warming up to these beaten down stocks soon.

Image Source: Getty Images.

This biotech is setting up for a stunning reversal

George Budwell(DynavaxTechnologies Corporation): Although Dynavax's shares didrip higher on the news that its experimental hepatitis B vaccine -- known as Heplisav-B -- is under review again with the FDA, the company's valuation still has a long ways to go in order to fully recover from the vaccine's last rejection:

Continue Reading Below

DVAX Market Cap data by YCharts

Long story short, Dynavax's shares are currently trading at around a third of Heplisav-B's estimated peak sales and roughly twice the company's last stated cash position.That's an overtly pessimistic valuation for a biotech with a late-stage candidate, especially since the company does have a handful of other clinical assets in mid to early stage development.

In short, the market appears to be saying that Heplisav-B's regulatory fate is already sealed, and Dynavax's cancer immunotherapy SD-101 doesn't stand much of a chance of reaching a pivotal stage trial. While bleak, this sentiment is certainly understandable in light of the company's recent past. Heplisav-B, after all, seemed to be steaming toward a regulatory approval last year, until the FDA issued a Complete Response Letter (CRL) that appeared to indicate that management was being less than forthright with shareholders.

Does management deserve the benefit of the doubt this time around? Two CRLs for a vaccine candidate with a robust clinical data set are certainly cause for concern. However, the fact of the matter is that Dynavax doesn't have a whole lot of experience when it comes to regulatory filings, and experience definitely counts in this complicated process.

So while the company did flat out fail to anticipate the FDA's latest questions surrounding Heplisav-B's safety profile, this isn't a particularly unusual hiccup for a biopharma with fewer than 250 employees. Larger pharmas, after all, can amass an army of dedicated professionals for a single regulatory application, whereas Dynavax has no such luxury. And that's a key reason why a disproportionate number of clinical-stage biotechs simply choose to license out their first late-stage candidate.

Hopefully, Dynavax's management has gotten it right this time, even with their limited resources. And if so, this beaten down stock should rebound in a big way.

This precious metals stock won't lose its sheen so easily

Neha Chamaria (Silver Wheaton Corp.): After a strong start to the year, shares of the precious metals royalty and streaming company have lost almost 13% in just the past month. None of it has to do with the prices of gold and silver, however, both of which have rebounded sharply this year. The problem lies with one of Silver Wheaton's sources, the San Dimas mine owned by Primero Mining.

As you may know, Silver Wheaton doesn't own and operate mines, but buys precious metal streams from other miners at a discount in return for financing them upfront to support their capital expenditure projects. Under its streaming agreement with Primero, Silver Wheaton receives 100% of the silver, up to 6 million ounces per year, and 50% of any excess produced at the San Dimas mine. With a strike halting operations at the mine, investors fear Silver Wheaton's sales could take a hit.

The market's fears aren't really unfounded, but it's important to know that Silver Wheaton gets a bigger chunk of silver from other mines like Penasquito and Antamina, with production from the latter even expected to rise, which could help offset part of the decline from San Dimas. Meanwhile, firmer metal prices should also help ease pressure on the streamer's top line. As it is, Silver Wheaton is among the lowest-cost and highest-margin companies in its peer group -- a position unlikely to change because of near-term production fluctuations. Most importantly, Silver Wheaton stock is already more attractive compared to streaming peers Royal Gold and Franco-Nevada, no matter which valuation metric you consider.

SLW Price to CFO Per Share (TTM) data by YCharts

While I'm not saying that issues at San Dimas won't hurt Silver Wheaton at all, I don't think the problem changes the investment thesis for the company -- and it's not like Primero won't try to address the concerns at the earliest. With part of the pessimism already baked into Silver Wheaton stock, long-term investors may want to get greedy while the market is fearful.

When 'strategic alternatives' isn't code for 'dying tomorrow'

Chuck Saletta (DHI Group): Staffing company DHI Groupis probably best known for its technology recruiting site dice.com. It's also struggling at the moment, as evidenced by its fourth quarter results where it turned in revenues excluding divestitures of around 11% below its year ago levels. DHI Group also lost $0.11 per share over the course of 2016, which was actually an improvement over the $0.21 per share it lost in 2015.

As a result of its poor performance, the company is seeking out "strategic alternatives" and suspended forward looking guidance. If there's one thing the market doesn't like, it's uncertainty -- such as the uncertainty you get when you stop forward guidance. If there's another thing the market doesn't like, it's the phrase "strategic alternatives", which is frequently code for "a dying business on its way out the door."

Still, unlike many companies that have suspended guidance and started searching for strategic alternatives, DHI Group has a lot going for it. First and foremost, it remains on operationally reasonable footing. It threw off $44.6 million in cash from operations in 2016 and generated $32.9 million in free cash flow. At its recent market cap of $253.1 million, it trades at less than 8 times that trailing free cash flow. That's a sign that the market has already priced in significant pessimism.

It's important to remember that in its recent earnings announcement, DHI Group's CFO called out that the business remains profitable, even as it seeks out its strategic alternatives. In addition, DHI Group has a reasonable balance sheet, with a debt to equity ratio around 0.82 and a current ratio of 0.65.The debt to equity ratio indicates that the company has some financial flexibility to handle the rough times, and the current ratio above 0.5 indicates that it's not immediately cash strapped.

DHI group has a business that generates cash and a balance sheet that gives it breathing room, yet its market price reflects the pessimism of "strategic alternatives" and "no forward guidance." Whether it figures out a path to return to organic growth or it finds a suitor willing to buy it out as-is, DHI Group is poised for a future less rocky than implied by its share price.

10 stocks we like better than Dynavax Technologies
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Dynavax Technologies wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017

Chuck Saletta has no position in any stocks mentioned. George Budwell has no position in any stocks mentioned. Neha Chamaria has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.