Just as we examine companies each week that may be rising past their fair value, we can also find companies potentially trading at a bargain price. While many investors would rather have nothing to do with companies tipping the scales at 52-week lows, I think it makes a lot of sense to determine whether the market has overreacted to the downside, just as we often do to the upside.
Here's a look at three fallen angels trading near their 52-week lows that could be worth buying.
Lowering the bar
You'd think that traders were putting out the limbo bar for the entire coal sector of late to see which company can hit rock bottom first. Given that nuclear energy has been put in the corner with a dunce cap on its head for years to come, and many alternative energy plays are still years away from being a mainstream energy source, coal is without a doubt the United States' primary source of power generation. This is also why taking a stab at Arch Coal (NYS: ACI) here might make a lot of sense.
It is very plausible that an economic slowdown could cause weakness in coal pricing and demand could slow from already high levels. But at some point, Arch Coal's dividend north of 2% and its sub-five forward P/E have to smack value investors in the face. Now trading just a hair above its book value and with an expected five-year growth rate that tops industry giantsPatriot Coal (NYS: PCX) and Peabody Energy (NYS: BTU) , I feel it's worth a closer look.
Add contrast to your portfolio
As I highlighted last week, every once in a while even 2% to 3% growth becomes attractive, as is the case with Xerox (NYS: XRX) . Xerox isn't going to give you a double-digit growth rate, but the value inherent in its brand name and its operating cash flow were enough for me to give this a closer look.
Upon closer inspection, I noticed that not only is Xerox trading for roughly 80% of its book value, but its dividend yield has also crept above 2%. Its most recent quarter detailed much of the same that we've been accustomed to with Xerox: Its service segment remains strong while rising costs continue to pressure margins. Currently, Xerox is able to reduce its expenses enough to keep profits up and dividend-seeking shareholders happy. While I'm not sold on its long-term growth strategy, I do think Xerox could make for a deep value turnaround story at these levels.
For the quarter, Autodesk saw revenue jump 15.5%, with growth across all geographic regions. Perhaps the market was unhappy with the 40 basis-point drop in gross margin all the way down to 91%? Maybe it's that the company guided precisely in line with the double-digit growth that Wall Street analysts had been expecting? Or could it have been the $1.37 billion in cash with no debt the company ended the quarter with? Gosh, this company sounds horrible, doesn't it? With a considerably healthier balance sheet than rival Parametric Technology (NAS: PMTC) and a faster growth rate than Adobe Systems (NAS: ADBE) , I have no choice but to give this software company a resounding two thumbs up.
The stock market's continued volatility is setting up what look like bargain basement buying opportunities. Keeping a watchful eye on companies that are ripe with cash and trading at considerably lower earnings multiples than in the past could be one way you defeat a sluggish economy.
What's your take on these three companies? Are these fallen angels worth a second chance? Share your thoughts in the comments section below and consider adding Arch Coal, Xerox, and Autodesk to your watchlist.
At the time thisarticle was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLongThe Motley Fool owns shares of Adobe Systems.Motley Fool newsletter services have recommended creating a diagonal call position in Adobe Systems. Try any of our Foolish newsletter servicesfree 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 adisclosure policythat's always on the lookout for a good deal.
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