Don't Count Out These Beaten-Down Stocks

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It's another exciting week at the market, isn't it? It's as fun as watching paint dry. The market might have paused briefly in its steady (and rather un-newsworthy) upward ascent, with some modest losses as the quarter draws to a close.

But individual stockholders have still been subject to violent movements. Many stocks are up, but some have fallen markedly from where they were just a year ago. Does that mean it's time to bail out? Not necessarily. Let's take a look at three stocks that have fallen on hard times despite capable business models. They might just deserve a spot in your portfolio today, before the rest of the market catches on.

Diamonds in the rough
While the broader market's been up over the past year, the stocks I sought out had fallen by at least 30% in that time frame. They also offered reasonable current and forward valuations (based on all the evidence, of course), and perhaps most importantly, they also offered strong forward growth potential. You can't have a rebound without something to juice the bottom line.

Company

Current P/E

1-Year Price Change

Projected 5-Year Earnings-per-Share Growth (annualized)

Forward P/E

Thompson Creek Metals (NYS: TC) 3.9(46.9%)21.2%7.5
Acme Packet (NAS: APKT) 40.1(62.9%)23.7%19.5
STEC (NAS: STEC) 18.7(53.0%)15.3%19.4

Source: Finviz.com and Yahoo! Finance.

Digging into profits
A lot of people are skeptical when confronted with a P/E as low as Thompson Creek's. But there are reasons to believe in its long-term success. The biggest is Mount Milligan, singled out by Foolish mining guru Christopher Barker and my walking-stock-encyclopedia colleague Sean Williams as a key driver of future growth. Though Thompson Creek isn't known as a gold miner, the shiny hoard in Mount Milligan holds a purported six-million ounces, in addition to 2.1 billion pounds of copper.

Thompson Creek's in a similar position to Taseko Mines (ASE: TGB) , another copper and molybdenum miner with depressed valuations. But that company now trades for six times Thompson Creek's tiny earnings multiple. Both of my Foolish colleagues have done an excellent job breaking down the bullish case around Mount Milligan, which may take time to produce profit, but will almost certainly do so regardless of whether gold resumes its epic surge. The mine will be operational by the end of 2013, so current shareholders may need to be patient; we do preach long-term investing at the Fool.

I'll be making an outperform call on this miner (as well as the other two stocks chosen here) in The Motley Fool's CAPS, and plan to hold onto it well past the end of 2013.

VoIP? Sounds foreign.
Acme Packet has gotten absolutely hammered over the last year, though as a former high-flying growth story that's endured painful downward earnings revisions, it's not necessarily unexpected. One issue is shrinking margins, which have had a big effect on the company's valuation:

APKT Revenues TTM Chart

APKT Revenues TTM data by YCharts

Another issue is reduced or delayed capital spending from major telecoms, which make up much of Acme's revenue. Waiting around for AT&T (NYS: T) to open up its pocketbook has been damaging. But this stock is a long-term pick. The Fool's Rule Breakers service picked Acme back in 2010 -- a rare misstep -- but if their underlying thesis is sound, and VoIP is the future of telephony, Acme is a much more compelling long-term play today than it was a year ago.

Changing to a new technology takes time, but Acme has solid footing in its field, and the real changeover hasn't yet begun. Keep your eye on this company -- I will, for at least three years.

STEC in a rut
Talk about falling off a cliff. STEC was cut nearly in half last year after punting badly on forward guidance. That brought the company's P/E down to territory it hasn't seen in years. Then there's the increasing competition in solid state drives, which threatens to send margins into a tailspin across the industry. All of this occurring before the devices have gained a foothold in the market means that you've got a dangerous storm to drive your portfolio into.

But when a company's been left for dead, it's important to ask whether that's justified or whether the market's succumbed to short-term thinking about a company with long-term strategies. As I mentioned with Acme Packet above, new technology adoption takes time to play out. The biggest problem solid state drives face is that their technology costs more for less storage. It's certainly faster than the spinning drives it's intended to replace, and that's where the debate will play out in IT departments around the world. Is speed worth it?

As connection speeds increase, storage capabilities might become less important than access times. STEC has a strong enough position in solid state drives to ride this wave once corporate clients understand the necessary trade-off. That's why I'm maintaining the outperform call I made in January.

Foolish final thoughts
I've given each of these companies an outperform call in CAPS, and I'll be watching their progress to see how my assessments bear out. You might not agree -- indeed, I expect it -- but I hope I've offered a reasonable explanation of my positions that you can incorporate into your investing thesis. If you're looking for a stock with bright prospects ahead, The Motley Fool's got you covered with our top stock for 2012. We've put together a free report that highlights one company's success in an industry that rewards long-term thinking, and its efforts to secure its position in Latin America. Find out everything you need to know -- click here to claim your free report now.

At the time this article was published Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights. Motley Fool newsletter services have recommended buying shares of Acme Packet. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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