Although the major market averages remain within an arm's reach of their all-time highs, many individual stocks have entered their own bear market in recent months. With few investors showing much buying interest right now, shares of these stocks have pierced their 52-week lows.
The key is to track these stocks because they could emerge as solid value plays. I've found four stocks that could fit the bill during this midsummer swoon.
Loews (NYSE: L )
52-week high/low: $49.43/$41.69
Recent price: $41.75
One of the most unheralded stories of America's recovery from the Great Recession of 2008 is the sharp improvement in the balance sheets of financial services firms. These firms have been rebuilding their capital base at a rapid rate, but still don't get credit for their efforts.
Case in point: Loews, a diversified insurer that has been generating robust profits and parking those earnings on the balance sheet. Loews' book value is on pace to nearly double this year from where it was at the end of 2008.
Loews' Book Value Keeps Rising
Tangible Book Per Share
More to the point, shares currently have a price-to-book value ratio of 0.81, meaning they trade for only 81% of the company's tangible book value.
To be sure, this isn't your typical financial services firm. Loews also owns hotels and has stakes in energy service providers, and it's that last segment that has weighed on results recently. Yet Loews is doing whatever any stock trading below book value should do: buying back shares. The company has already spent more than $300 million on buybacks this year, and it has left the door open to more repurchases as the year progresses.
Though Loews pays a modest dividend, buybacks are the way to go for now. As interest rates rise, and Loews' interest income rises in tandem, shares are likely to rally up past book value, at which time dividend growth will become a more logical policy.
Abengoa Yield (NYSE: ABY )
52-week high/low: $40.98/$33.91
Recent price: $34.22
In the clean energy space, I remain a big fan of Spanish energy firm Abengoa (Nasdaq: ABGB ) .
A couple of months ago, I suggested Abengoa's new yield-focused spinoff, Abengoa Yield, would provide solid income streams for investors . At the time, ABY's projected yield stood at around 5%, but as the market has dragged this stock lower, that yield is marching toward the 6% mark.
It's hard to cite any specific reasons for recent share price weakness (for both the "yieldco" and the parent company), but it may reflect broader skittishness around European stocks. But Abengoa -- and the yield play -- are fairly well insulated from economic risk, thanks to long-term contracts.
European firms report financial results just twice a year, so investors might want to wait for the next round of results to ease any concerns.
Roundy's (Nasdaq: RNDY )
52-week high/low: $10.96/$4.06
Recent price $4.14
This Milwaukee-based grocery chain just hit fresh all-time lows, thanks to lackluster sales and too much debt. Highlighting just how tough the grocery business is these days, Roundy's margins on EBITDA (earnings before interest, taxes, depreciation and amortization) have slid to 4% from 6% in 2007 through 2011. That has prevented management from rapidly paying down the company's debt, which has fallen from $884 million in 2010 to a recent $700 million. Interest expense consumes more than $50 million annually. Still, after a recent series of investments and sales of certain stores, Roundy's generates roughly $120 million in annual EBITDA.
Right now, interest expenses, coupled with a large slate of new store openings, are preventing Roundy's from generating positive free cash flow. But once the current phase of capital spending subsides, Roundy's appears set to generate $30 million to $40 million a year in free cash flow.
The value angle: The entire company is now valued at less than $200 million. Look for value investors to lock on to this stock once management begins to focus on the cash flow potential of this business model in 2015 and beyond.
New Germany Fund (NYSE: GF )
52-week high/low: $24.27/16.53
Current price $16.60
This closed-end fund has fallen out of favor with the rest of Europe in recent weeks. It's hard to ignore the fact that Germany's key trading partners are struggling and the prospects for German-Russian trade may also be dimming. But Germany remains one of the most dynamic economies in the world, and the 30% pullback from the 52-week high is just as hard to ignore.
There are also two value factors. First, shares of this fund trade below the stated net asset value ( NAV ) of $18.63 a share. Second, the fund's sponsor is in the midst of a buyback program, which is quite unusual in the world of mutual funds.
The focus for this fund is mid-cap German industrials, many of which are strong exporters. According to Morningstar, the average holding in this fund trades for less than 3 times trailing cash flow, which is hard to verify. But if that figure is correct, it represents an extreme value.
Risks to Consider: As with many value plays, these investments lack catalysts. Investors shouldn't view them as short-term trading opportunities.
Action to Take --> When the market is looking for excuses to sell, it often overlooks key value metrics. These four investments appear very inexpensive in the context of their balance sheets and cash flow statements.
P.S. -- One of the greatest value investors ever, Warren Buffett, doesn't just sit around and wait for a great deal on a high-quality stock he wants to own. In fact, one of his favorite investment strategies allows him to buy a stock at the exact low price he wants -- while generating huge streams of income. My colleague Michael Vodicka has been using this same strategy on some of the world's most reliable dividend payers to generate annualized income yields of up to 80% in just over a month's time… with the chance to buy these companies at a huge discount. To learn more about this Income Multiplier strategy, click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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