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.
Don’t forget the cash flow
With austerity measures hitting home in Europe, it’s fairly easy to understand why Telecom Italia SpA (ADR) (NYSE:TI), Italy’s largest telephone service provider, has struggled mightily. Unlike in the U.S., where a landline or cell phone are viewed as practical necessities, consumers in Italy have had no problem giving up their landlines, or businesses postponing their network expansion, until Italy’s economy improves. In fact, in Telecom Italia SpA (ADR) (NYSE:TI)’s first-quarter report, we saw EBITDA decline 10%, to $3.5 billion, and overall sales dip 8%.
Despite the negativity, I’m going to point investors to the same factor that made me think so highly of France Telecom SA (ADR) (NYSE:FTE) last year: Telecom Italia SpA (ADR) (NYSE:TI)’s cash flow.
While I certainly don’t expect Telecom Italia SpA (ADR) (NYSE:TI)’s landline business to spring a miraculous rebound, the company can thwart unnecessary spending in order to maximize its cash flow, and calm nervous investors. Despite the deepest recession Europe has seen in more than a generation, Telecom Italia SpA (ADR) (NYSE:TI) has generated an average of $3 billion in positive free cash flow over the previous four years. That cash easily buoys the company’s current 3% yield, and goes a long way to calming skittish investors who worry about its $42 billion in net debt.
Another factor that can’t be overlooked is Telecom Italia SpA (ADR) (NYSE:TI)’s plan to spin-off its fixed-line network. The deal, which would allow it to spin-off its fiber and copper assets into a company worth about $18 billion, would help generate cash, and would certainly make it easier for prospective investors to understand how the company makes money.
At less than five times cash flow, Telecom Italia is a name I strongly suggest you dig more deeply into.
What the Teck?
If you invest in commodity-based companies or miners, you’ve probably uttered the phrase “What the heck?” a few times over the past year. I know I have! However, I feel there are plenty of reasons to believe that Teck Resources Ltd (USA) (NYSE:TCK), a miner of everything from copper and zinc to coal and silver, will turn things around.
Not to sound like a broken record, but have investors given absolutely no consideration to Teck Resources Ltd (USA) (NYSE:TCK)’s cash flow? Teck Resources Ltd (USA) (NYSE:TCK) did see commodity prices shrink almost across the board in the first quarter, but it was still able to generate $776 million in positive free cash flow. Like Telecom Italia, this cash flow helps Teck Resources Ltd (USA) (NYSE:TCK) pay out what amounts to a 3.8% yield, and also allows the company to finance some of its exploratory projects with operating cash rather than taking on any additional debt. Not to mention that Teck Resources Ltd (USA) (NYSE:TCK) has averaged $1.95 billion in free cash over just the past four years.
There’s also strength to be had in Teck Resources Ltd (USA) (NYSE:TCK)’s diversity. Given that it produces metals known for their volatility, like silver, as well as more stable metals like copper, Teck offers a little something for every level of metal and mineral investor. I also happen to be an optimist when it comes to the coal sector, because overseas markets like China and India should soon step in and help buoy demand and pricing. With a diverse product portfolio, Teck should be able to weather any economic storm.