Even with the market as a whole doing well over the last year, a number of stocks have seen significant declines in their stock prices. While this at least in part due to poor company performance, it’s also possible for markets to get carried away. While there are a number of ways to measure value (or potential value), one technique is to look at the forward price-to-earnings multiple to see how the current valuation compares to expected earnings per share for the next year. Investors can then perform further research on any interesting names and decide whether or not it is work the risk to trust the sell-side over the market.
Using data from Fidelity, here are five stocks which are down at least 25% in the last year and which are valued at less than 10 times forward earnings estimates:
The top two
The first troubled company on our list is Barrick Gold Corporation (USA) (NYSE:ABX). Barrick has fallen nearly 60% in the last year, as gold prices have recently declined substantially. In the first quarter of 2013, earnings fell 19% versus a year earlier- and gold is down further since that time. It’s always risky to be long gold in any form, but Wall Street analysts are optimistic that Barrick Gold Corporation (USA) (NYSE:ABX) will do all right in 2014 leading to a quite cheap forward P/E. The stock also pays a 4.7% dividend yield at current prices, though continued trouble for the company would likely lead to the dividend being cut.
Teck Resources Ltd (USA) (NYSE:TCK) also meets our criteria, with the stock sliding 30% over the last year and with the $12 billion market cap industrial metals company trading at 9 times forward earnings estimates. Teck Resources Ltd (USA) (NYSE:TCK) focuses on copper, metallurgical coal, and zinc; with demand for these resources being highly dependent on macro conditions, the stock’s beta is 2.5. It’s another stock which- at least going by recent dividend payments- is a high yielder, at 4.1%. In addition, its net income actually increased last quarter compared to the first quarter of 2012, even though revenue was down.
Best of the rest
A roughly 50% decline over the last year has brought Apollo Group Inc (NASDAQ:APOL)’s earnings multiples much lower, including a forward P/E of 9. The for-profit education company is clearly in decline, with revenue falling 13% in its most recent quarter compared to the same period in the previous fiscal year and net income down nearly 80%, and many market players remain short the stock. As such Apollo Group Inc (NASDAQ:APOL) seems like quite a risk to us.
We track quarterly 13F filings from hundreds of hedge funds and other notable investors as part of our work developing investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year) and can see from our database that billionaire Glenn Dubin’s Highbridge Capital Management bought 1.4 million shares during Q1; see Dubin’s stock picks.
Oil and gas exploration and production company Halcon Resources Corp (NYSE:HK) focuses on onshore U.S. shale plays such as North Dakota’s Bakken. It is down over 40% in the last year, with many market players expecting further declines (16% of the float is held short). Profitability is very low, but revenue has recently been surging as production has increased. Consensus forecasts see EPS roughly doubling from 31 cents this year to 64 cents in 2014. If Halcon Resources Corp (NYSE:HK) hits that target then the current market capitalization of just over $2 billion would represent a forward earnings multiple of 9.
Rounding out our list is Cliffs Natural Resources Inc (NYSE:CLF), which has plunged over 60% since the end of June 2012. It’s also a quite popular short target, with the most recent data showing that short sellers are responsible for 32% of the float. Cliffs produces iron ore and metallurgical coal- each an input in steel production, and therefore dependent on the overall economy. At its current market cap, it is valued at 9 times expected earnings for 2014. SAC Capital Advisors, managed by billionaire Steve Cohen, owned 3.5 million shares of Cliffs Natural Resources Inc (NYSE:CLF) as of the end of March; find Cohen’s favorite stocks.
Final thoughts
There are many ways to analyze Mr. Market and its hundreds of publicly traded companies, but one way to find deep value plays is by looking at stocks that are down significantly and cheap. Obviously, the aforementioned five companies—Cliffs Natural Resources, Halcon Resources, Apollo Group, Teck Resources Ltd (USA) (NYSE:TCK) and Barrick Gold Corporation (USA) (NYSE:ABX)—can be considered value traps, but there’s an equal chance that they could turn it around. We’ll be watching closely for the rest of 2013.
Disclosure: none
