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.
Powering up
It’s pretty rare for stocks in the electric utility sector to see a prolonged dip given that electricity is a necessity product, but that’s what we’ve seen from Mid-Atlantic electric utility provider Pepco Holdings, Inc. (NYSE:POM).
Three primary factors have been working against Pepco Holdings, Inc. (NYSE:POM) since the recession. First, a big need for infrastructure upgrades has required the company to spend an average of about $1.2 billion per year on maintenance and improvements. Second, over the past year, state energy regulators have been unwilling to approve needed rate increases to support the rapid expansion of these improvements. Finally, untimely and unexpected weather events like Superstorm Sandy socked electric utilities on the East Coast and necessitated big spending just to get things back in order.
The good news is that all three of these factors are likely short-term drivers of the share price and Pepco Holdings, Inc. (NYSE:POM) looks primed for a rebound. Although the weather can never be predicted with any accuracy, the chances of a repeat of a Superstorm Sandy-scale storm is historically pretty small for a while. In addition, energy regulators rarely have the upper hand for long when it comes to electric utility pricing. Pepco Holdings, Inc. (NYSE:POM) is seeking what I feel is a very reasonable 10.25% equity return rate, which is pretty consistent with the industry average. Expect these rate increases to be approved this year. Going in reverse, even its energy infrastructure upgrades should work in its favor. While this spending isn’t likely to abate soon, the higher efficiency from already completed upgrades should begin lowering its costs and boosting its bottom line, making it easier to top Wall Street’s expectations.
Although Pepco Holdings, Inc. (NYSE:POM) is projected to pay out what may be close to 100% of its total profits in the form of a dividend, I don’t feel there’s cause for concern yet that a dividend cut may be coming. In the meantime, shareholders are going to collect a better-than-5% yield for a utility priced only 20% above book value. It may not be ideal, but the catalysts for a turnaround are there!
Digging the chance for a rebound
If you’ve been keeping your eye on the oil and gas drilling sector lately, you’d be hard pressed to find poorly performing companies, but offshore services company McDermott International (NYSE:MDR) is one of the few that fits the bill.
As my Foolish colleague Travis Hoium pointed out in May, McDermott International (NYSE:MDR)’s problems have been primarily relegated to poor execution on its own part. The company reversed a year-ago profit into a loss in its Middle East operations and actually saw utilization rates for its fleet drop year over year. Yet for all the negatives surrounding McDermott International (NYSE:MDR), I see an incredibly intriguing value and a moat of opportunity.
For starters, McDermott International (NYSE:MDR) still boasts a healthy backlog of $5.3 billion in orders. Even if short-term drivers like instability in the Middle East and a slowdown in GDP growth in China are hurting orders now, the long-run view of offshore drilling is still incredibly bright, with more than enough contracts to be won by all participants. According to PennEnergy, about one-third of the world’s oil output is now coming from offshore sources, and this figure is only bound to increase as China and other emerging markets’ needs for fuel sources rise.
