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 write off this sector just yet
Want to know a surefire way to scare an investment banker away with two simple words? Just say “mortgage REIT” and you’ll likely see him or her scamper away.
The mREIT sector has been nothing short of slammed over the past quarter on speculation that the Federal Reserve will begin winding down its $85 billion in monthly bond purchases, which have worked in mREIT’s favor by keeping long-term lending rates at historically low levels. I, however, see things a bit differently and think plenty of opportunity still exists here, including with American Capital Mortgage Investment (NASDAQ:MTGE).
There are two ways to play the mREIT sector. The first method is by purchasing agency-only mREITs like American Capital Agency Corp. (NASDAQ:AGNC). Agency-only mREITs purchase mortgage-backed securities and mortgage loan assets that are fully backed by the U.S. government in case of default. Often this means agency mREITs can utilize high leverage ratios but usually deliver lower net interest margins. American Capital Agency Corp. (NASDAQ:AGNC) has used this leverage to its advantage and currently delivers a projected yield of 20%!
Then there’s the second method, which is by purchasing hybrid companies that buy agency and non-agency MBS’s. Non-agency loans aren’t backed by the government, which means any defaults are taken as losses on the balance sheet. The trade-off is that non-agency loans yield much higher net interest margin rates.
For American Capital Mortgage Investment (NASDAQ:MTGE), investors seem hell-bent to focus on its non-agency risk when just $727 million of its $11.8 billion investment portfolio is tied up in non-agency investments. Other metrics, including its leverage ratio of 4.9 and net interest margin of 1.90%, appear to be well in line with the sector average. Furthermore, American Capital Mortgage Investment (NASDAQ:MTGE) is trading at just 68% of its book value, implying that investors may be emotionally overreacting on this move lower.
Even if American Capital Mortgage Investment (NASDAQ:MTGE) had its payout halved, it would still net investors close to 10%. I think this is an mREIT you need to dig more deeply into.
Screening for great deals
If you’re looking for a potentially undervalued medical device and diagnostics company, consider looking no further than Hologic, Inc. (NASDAQ:HOLX).
With Hologic, Inc. (NASDAQ:HOLX) completing the sale of its Lifecodes business segment to Immucor in March and Europe consistently weighing down medical device and diagnostic sales lately, investors have multiple reasons to be skeptical of Hologic’s impending growth slowdown. With a forecast sales growth rate of 26% in 2013, it’s a bit disappointing to see sales growth slow to just 6% next year. But I see multiple growth drivers on the horizon.
Nothing in Hologic, Inc. (NASDAQ:HOLX)’s pipeline of products offers more promise than its 2D + 3D mammography Affirm breast biopsy guidance system. One of the biggest challenges in diagnosing and treating breast cancer is getting an accurate and detailed view of the area of concern. Hologic’s mammography products are making this process quicker, cheaper, and more reliable for patients. This should be an area of big growth given that breast cancer is the second-most diagnosed of all cancer types.
