Just as we examine companies each week that may be rising past their fair value, we can also find companies potentially trading at bargain prices. 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 when the market reacts to the upside.
Here’s a look at three fallen angels trading near their 52-week lows that could be worth buying.
This valuation stinks
The fertilizer certainly hit the fan late last month after Russia’s Uralkali, the largest maker of potash in the world, decided it would no longer be part of a price-fixing cartel and would instead sell its potash on the open market at spot prices. Needless to say, potash producers were creamed on the news with the expectation that potash prices might fall by as much as 25%.
For some, the haircut they took makes sense. I keep pointing back to Intrepid Potash, Inc. (NYSE:IPI) as my sector guinea pig, but with good reason. Intrepid Potash received 84.4% of its revenue in the latest quarter strictly from potash sales, so a reduction in selling prices here will cripple its margins. It also doesn’t have nearly enough capital to mix up its product line or make acquisitions to stave off this risk.
On the other hand, the negativity surrounding South America’s Sociedad Quimica y Minera (ADR) (NYSE:SQM), which I’ll just refer to as SQM to save time, makes little sense to me. Shares have been cut about 58% from their 52-week highs despite the fact that it continues to deliver revenue and profit growth in an environment with lower spot commodity prices. What intrigues me most about Sociedad Quimica y Minera (ADR) (NYSE:SQM) is its business diversity. The company, in addition to potash, makes iodine and lithium-based plant nutrient derivatives and also has an industrial chemicals business. Although some of these businesses are dependent on a growing global economy, most of its business will naturally grow as the need for more food and higher crop yield increases as the world’s population grows. Furthermore, SQM looks as if it’s about to make big gains in the iodine and lithium nutrient derivatives market.
With Sociedad Quimica y Minera (ADR) (NYSE:SQM) valued at 14 times forward earnings, I believe the negativity surrounding potash prices has been more than accounted for in its share price and would recommend digging deeper into what could be a very profitable international crop nutrients play.
Play into this cyclical stock
While always thinking for the long term, sometimes intriguing intermediate-term investments of one to three years do rear their head. This is exactly what I feel we have in semiconductor test equipment maker LTX-Credence Corp (NASDAQ:LTXC).
LTX-Credence’s third-quarter results released in May weren’t too encouraging — there’s no sugarcoating it. The company’s boost 18% boost in revenue was welcome news, as was its narrower quarterly loss, but revenue for the third quarter and upcoming sales guidance for the fourth quarter (which it’s yet to report) both came in below the Street’s expectations. In today’s global economy, many wireless and PC businesses are holding back on orders until growth prospects are clearer, and that is hurting LTX-Credence’s outlook.
The good news is, it is historically the best time to buy LTX-Credence Corp (NASDAQ:LTXC) when things are the most glum. You see, the company keeps an excessive backlog of cash on hand because it understands the cyclicality of its equipment business. In the latest quarter, LTX-Credence ended with $2.66 in cash per share compared to zero debt. Considering that the stock closed yesterday at $4.92, investors have quite a bit of cushion below them if this weakness continues for two, four, or six more quarters.