There are many investing maxims, but my favorite one will always
be "love stocks when they're hated." That usually refers to
markets being great buying opportunities, as we saw in early 2009
when the market finally began to turn around. Yet, the same logic
applies to individual stocks. I have no interest in a stock that is
hitting new highs as more investors jump into the name. I've often
found that there's little upside left when everyone already gushes
about a stock.
Instead, I like to focus on stocks that are unloved. They are
usually suffering from self-inflicted wounds that have placed them
in the penalty box. To be sure, some lagging stocks will be
hard-pressed to rebound for several years as management works to
turn things around. Yet, some stocks are likely to be in the
penalty box for just a few periods and, with a little foresight,
you can identify when investors' moods will shift around. Buying
before that time comes is always the focus of value investors.
Here are three stocks hitting 52-week lows this week. All three now
represent compelling values in relation to their still-strong
1. American Superconductor (Nasdaq: AMSC)
I first profiled this maker of wind turbine equipment
about a year ago
, noting that the company was in the midst of a strong growth
phase. Back then, I noted that sales looked set to rise to $400
million in fiscal (March) 2011. Instead, American Superconductor
pre-announced sales of $435 million, up nearly 40% from the prior
year. Trouble is, management said that the upcoming June quarter
will see a sequential dip in sales before sales growth returns in
subsequent quarters. The predictable reaction: investors dumped the
shares down to a 52-week low of $21.70 on Monday, March 14.
Perhaps lost in all the action was that American Superconductor
also announced an impressive $265 millionacquisition that greatly
expands the number of products it sells into its base of wind power
customers. American Superconductor is acquiring Finland-based
Switch Engineering, which provides power converter systems. Switch
has been focusing on the use of large permanent magnets that
capture energy from spinning turbines. These are increasingly
replacing gearing systems, which have tended to wear out in these
high stress environments.
In posting the deal, American Superconductor noted the things I
look for: Most of the deal is being paid from existing cash
balances, meaning it is not issuing too many new shares or issuing
debt; the deal will immediately boost profits (on a per-share
basis); and the acquired company faces a large potential market,
perhaps on the order of $1 billion annually.
As noted, American Superconductor expects to see a modest sales
slowdown in the June quarter. Yet, the company remains the premier
play on wind power in China. The rising concerns about nuclear
power due to the disaster in Japan could well encourage China to
step up an already-ambitious wind power development program. With
or without that, I expect American Superconductor to be a solid
grower -- on an annual basis -- despite any near-term concerns.
2. Central European Distribution (Nasdaq: CEDC)
From $40 to $12 -- that's how far shares of this maker and
distributor of spirits have fallen in the past year. Shares took a
final ignominious blow in the last few weeks as the company
announced that 2010 fourth-quarter results were hit by a litany of
bad news. A dispute with Russian authorities led to a vodka plant
closing for two weeks -- right at the peak of the season. The
company saw very heavy pricing promotions from rivals in Poland
that led to lost
. (Those price wars have now ended.) In addition, surging
costs for grains and other items led to an unexpected jump in
All of these factors have tarnished the company's reputation with
investors, but it's worth noting that this kind of big quarterly
shortfall pops up every year or two. If you take a step back,
you'll notice a more appealing picture. Central European
Distribution has developed or acquired a range of leading alcohol
brands in Russia and Eastern Europe. As it has grown, the company
has been able to take advantage of many scale economies, which have
yielded very impressive results. EBITDA margins rose from 20% in
2007 to 27% by 2009. The economic crisis, which still lingers in
Eastern Europe, has dented the
, but as regional economies start to rebound, demand for alcohol
should as well. When that happens, this business should once
Last summer, this stock traded for roughly 25 times forwardearnings
, thanks to its strong role in an economically expanding region.
But with the sell-off, that forward multiple has slipped below 10,
based on projected 2012 profits. It may take several quarters for
Central European Distribution to regain investor credibility, but
that single-digit multiple won't likely last through the year.
3. HHGregg (Nasdaq: HGG)
About a month ago, I thought shares of this electronics retailer
held great appeal
Well, the recent stock market weakness has pushed shares down
another 10% since then, to a two-year low on Monday, March 14.
Nothing has changed since then, except the stock's valuation has
become even more attractive, trading at about 11 times fiscal
(March) 2012 profits. I don't see any near-term catalysts -- except
for a potential market-led relief rally -- so you may want to put
this on your watch list until the fiscal fourth quarter results are
released in late April. Yet, the retailer's steady expansion plans,
coupled with strengthening consumer spending, could move this
high-growth story back into favor in coming quarters.
Action to Take -->
Stocks hitting 52-week lows have one shared flaw: They usually need
time to be seen in a better light by investors who have just dumped
shares. But each of these companies should be positing better
results later this year, and each now sports a compelling valuation
that should have investors giving them a second look.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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