3 Beaten-Up Cheap Stocks: Are They Bargains?

By Rick Munarriz Markets Fool.com

The market's been rallying this year, but not every investment is moving higher. There are plenty of stocks that have taken a beating this year, including several names that you may already know.

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Let's take a look at three high-volume stocks that have shed more than half of their value so far in 2017, and assess if they have what it takes to bounce back or if the markdowns may only get worse.

Image source: Rite Aid.

Rite Aid:Down 58%

The drugstore operator was supposed to be a smooth winner this year. Rite Aid (NYSE: RAD) began the year trading at a discount to the price thatWalgreens Boots Alliance(NASDAQ: WBA)was going to pay in a buyout. However, Rite Aid stock began to take a hit as the deal failed to close by the original late January deadline and theFederal Trade Commission grew more nervous about approving the combination.

Rite Aid had to accept a reworked deal where it would have to unload more stores and Walgreens would pay less. Anti-trust regulators have yet to approve the deal that was originally announced in 2015, and investors are concerned that we may blow through the new summertime deadline.

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The good news for Rite Aid investors is that the stock was trading substantially higher than it is now before Walgreens Boots Alliance swept in as a suitor. Rite Aid's fundamentals have taken a hit as it's been in limbo as a lame-duck drugstore, but it may be in a win-win situation here where the stock moves higher if the deal closes but also higher if it falls apart.

Frontier Communications:Down 61%

It isn't easy being a regional telco these days. Folks are dissing landlines and cutting cords, and smaller players are struggling to adapt. Frontier Communications (NASDAQ: FTR) is going the wrong way. It's coming off yet another quarter of sequential declines for revenue and customers.Frontier's quarterly loss more was twice as large as analysts were expecting.

Frontier also slashed its juicy dividend by more than half, though it's still a fat 12% yield at present levels. It will execute a 1-for-15 reverse split in the summer, a move that will get the stock back up to respectable levels at the expense of a hit to investor confidence.

Analysts reacted largely negative to the report, but there was no bear as voracious as Josh Resnick form Jericho Capital Asset Management. He presented Frontier as a good short candidate during the 2017 Sohn Investment Conference earlier this month, arguing that the stock looks as if it's headed for bankruptcy with 100% downside for current investors.

As for its turnaround potential, it's probably best to steer clear of Frontier until at least after the reverse stock split settles. Stocks tend to weaken leading up to and in the days subsequent to a reverse split.

Fossil Group: Down 57%

Selling designer watches is a tough gig these days. Wrists are reserved for smartwatches or fitness trackers, and smartphones tell time. Fossil Group (NASDAQ: FOSL) initially held up well during the mobile revolution, but it's been seeing sales head south since 2015. Fossil posted a 12% decline in sales in its latest quarter with weakness across all product categories in all territories.

Fossil rightfully diversified away from watches a few years ago, turning to leather goods and jewelry to spread the risk around. However, those two categories actually suffered even steeper declines than its signature timepieces.

Fossil's hot brand helped its diversification efforts, but fickle fashion cuts both ways. Fossil faces the daunting task of trying to push a product with waning demand and a once-hot brand that has faded. The road to recovery will be challenging on both fronts, but analysts see strong profitability through the final three quarters of this year. If it can live up to those expectations -- a hard lift, sure -- the stock would be a compelling value. If sales continue to sputter and profitability disappoints, it will be a slow fade for the brand and the stock.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Fossil Group, Inc. The Motley Fool has a disclosure policy.