3 Value Stocks You Need to Follow

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Just as we often examine companies that may be rising past their fair values, we can also find companies trading at what may be bargain prices. While many investors would rather have nothing to do with stocks wallowing at 52-week lows, I think it makes a lot of sense to determine whether the market has overreacted to a company's bad news, just as we often do when the market reacts to good news.

Here's a look at three fallen angels trading near their 52-week lows that could be worth buying.

Ironing out the details
If someone ran into the room and yelled "earthquake" shareholders of iron ore miner Cliffs Natural Resources would be set as they've been in the duck and cover position for much of the year. This past week was no different with Nomura Financial analyst Curt Woodworth raking Cliffs over the coals by slashing its price target to just $5 per share.

Source: Cliffs Natural Resources.

Specific to Woodworth's complaints was a $55 per ton decline in iron ore prices this year and Cliffs' desire to enact a $200 million share buyback despite needing to amend its revolving credit line up to $1.75 billion from its current level of $1.25 billion in order to do so. Ultimately, Woodworth expects Cliffs to cut its dividend once again in 2015. Keep in mind that Cliffs already slashed its dividend by roughly three-quarters in in Feb. 2013 in order to conserve cash, so this sting is still fresh in many investors' minds. 

Yet, I suspect this value stock could have all the tools necessary to mount a turnaround. Keep in mind there are many definitions of what a value stock truly is, so there's certainly some interpretation to what qualifies as a value stock and what doesn't. In this particular instance I'd suggest that at well below its book value (just 29% of book value) Cliffs is being priced as if the company's business model is in long-term jeopardy.

I'll admit I'm not a huge fan of the company's share buyback announcement considering falling iron ore prices, but I also expect the fundamentals of the iron ore industry to turn sooner rather than later. China is still growing in excess of 7% a year, and a number of other emerging market economies should continue to have a growing need for the product which is most often used to make steel.

Source: Cliffs Natural Resources.

Even if this scenario doesn't turn as quickly as expected, Cliffs has the ability to sell off some of its assets in order to raise cash. Though Cliffs would be unlikely to receive a premium valuation for its assets given its well-known constraints, the long-term fundamentals of the iron ore industry should be just fine, meaning it still has some leverage to work with. As Bloomberg noted just last week, some Australian miners may already be showing some initial interest in Cliffs' assets.

Lastly, don't discount the fact that activist hedge fund Casablanca Capital, which owns 5.2% of outstanding shares, is fighting for its interests and the interests of other shareholders. Activist hedge funds have been sort of a saving grace for investors in recent years, and I wouldn't overlook the idea that Casablanca pushes through some changes that benefit investors.

Drilling deep for value
For a second consecutive week we're going to take a closer look at a well-positioned offshore driller - this time Ensco .

Source: Ensco.

Ensco shares, along with the entire sector, have been creamed over the past few months as oil prices have plunged to multi-year lows and the offshore drilling market continues to be bogged down by the introduction of new rigs and the slow retirement of aging rigs. As this transition remains ongoing throughout the remainder of the decade certain offshore drillers may have difficulty in securing longer-term contracts at healthy dayrates. Ensco's fiscal 2015 EPS estimates, for example, have fallen close to 10% in just the past two months.

Also, falling oil prices don't give integrated oil and gas companies much incentive to boost their production potential. Don't get me wrong; these companies are still engaging in plenty of exploratory drilling, but the desire to boost production and sign onto longer-term deals may not be there.

But, at a forward P/E of just seven I believe now could be the time to consider a value stock like Ensco.

The reality of the offshore drilling sector is that it's filled with a lot of poorly diversified fleets. Drillers have been relying on aging rigs for years or decades and have kept their profits up and costs down by not ordering new rigs quickly to replace these aging rigs. Per Ensco's data, 28% of its jackup rigs and 18% of its floater rigs will be 35 years or older by 2017.

Source: Ensco.

Despite these figures, Ensco, has a fairly young fleet relative to its peers. It has 123 jackup rigs currently on order as well as 92 floater rigs, of which 52 of those floater rigs are already contracted as of the end of August. Newer drilling rigs have a significantly higher utilization rate because they're much more efficient at retrieving oil and gas assets buried deep under the seafloor. In addition, newer rigs also command much better dayrates, which should translate into beefier profits for Ensco. Based on Ensco's latest quarterly data, it boasted a 93% market utilization rate for its floaters and 91% for its jackup rigs.

Though I'm no fortune teller and Ensco could certainly fall further as emotional traders have their way with the stock, I'd opine that now could be the time to consider dipping your toes into the water. If anything, Ensco's nearly 8% dividend yield gives investors plenty of reason to stick around for the eventual turnaround.

More lustrous than ever
Lastly this week, and keeping with our theme of commodity inexpensiveness, I'd strongly suggest that investors consider taking a closer look at metal royalty interest company Silver Wheaton .

Traditional miners, for example, not only move up and down as metal prices vacillate, but they also have to deal with labor costs, mine expansion costs, and a number of other unforeseen events. Silver Wheaton, on the other hand, has a very simple business model: It provides upfront cash to miners in order to facilitate the build-out of a mine or groups of mines in exchange for purchasing some or all of the metals recovered at the developed mine(s) in question at a very low fixed cost.

Source: Silver Wheaton.

As you might imagine, seeing silver drop to a four-year low last week was more than enough to also push Silver Wheaton much lower. Sentiment around the entire metals sector is terrible right now with many miners scrambling to cut costs in order to improve their profitability in an environment where spot prices are falling. Despite falling silver prices, though, I feel Silver Wheaton might be too attractive a value stock to pass up.

At a forward P/E of 18 Silver Wheaton certainly doesn't fit the bill of a traditional value stock, but its PEG ratio of approximately 1 and ridiculous profit margin over the trailing 12-month period of 48.5% certainly classify Silver Wheaton as undervalued in my book.

The best thing Silver Wheaton has going for it are fixed-price contracts. As of Silver Wheaton's most recent quarterly results the company noted average cash costs of just $393 per ounce of gold and $4.72 per ounce of silver. Including the company's few employees and other expenses gold and silver prices would have to collapse an additional 50% before I'd even worry in the least.

Source: Silver Wheaton.

Furthermore, Silver Wheaton's contracts are set up so that they're often based on the life of the mine or for an extensive period of time. In other words, Silver Wheaton has predictable cash flow, and Wall Street tends to love predictable cash flow. Keep in mind, too, that supply and demand do play a role in metal prices, and emerging markets in Asia should act to buoy silver prices simply through increasing demand.

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The article 3 Value Stocks You Need to Follow originally appeared on Fool.com.

Sean Williams  has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name  TMFUltraLong , track every pick he makes under the screen name  TrackUltraLong , and check him out on Twitter, where he goes by the handle  @TMFUltraLong . The Motley Fool owns shares of Cliffs Natural Resources and Silver Wheaton. (USA). 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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