When all three major indices are reaching multi-year highs and almost every stock seems to be over-bought, it is hard to find bargain investments. This article lists three stocks that are trading near their 52-week lows. Cheap does not equal value always as some stocks are cheap because they deserve to be. Some stocks are cheap due to temporary hiccups and it is such stocks that long-term investors should buy. To quote Warren Buffett, you must be greedy when others are fearful.
It is certainly not an understatement to say investors are fearful of these three stocks: Apple (AAPL), Freeport-McMoRan (FCX), and Lorillard (LO). The table below shows how far these stocks are from their 52-week highs and lows. Granted, the 52-week range often doesn't mean much by itself but it can certainly be used as one of the many steps in the decision process. Let us get into the details by seeing why these stocks are down and why they might be good buys here.
Why Is It Down:
- Funds losing confidence: As noted in this piece by Fortune's Philip Elmer-Dewitt, institutional investors have been selling Apple in loads. Losing institutional support is detrimental to any stock, particularly to a growth stock. In what could turn out to be good news for Apple in the end, Google (GOOG) has now taken over Apple's spot as the most-owned stock in mutual funds.
- Growth and Management Concerns: Apple has been a "creative-destruction" master over the years, introducing new products that not only revolutionized industries but also cannibalized its own old products. There has not been a new product since the iPad in 2010. Concerns about the management are increasing every day, especially about the way cash is being handled and innovation. Tim Cook's public appearances too have not been favorable for the stock.
- Potential Dividend Increase: In 2012, Apple announced its dividend and buyback program on Monday, March 19th. It has almost been a year since that announcement. Apple's "cash-hoarding" behavior makes it more likely to be an annual dividend growth stock than one that throws away money on acquisitions or large one-time dividends. Maybe, March 18th, 2013 is the day Apple announces something about its cash again.
- iPhone Refresh: Granted, the iPhone and iPad refreshes might be tiring out the customers but it is hard to imagine Apple not selling millions and millions of its new products with a week after an introduction. With reports coming out of an early iPhone 5S release, look for the stock to bounce. The features of this phone are already being debated, with a wireless charging capability being predicted.
- Valuation: At the expense of sounding repetitive, it is hard to make a case for Apple without talking about its valuation and balance sheet. This article shows that Apple's P/E has been below the current level only about twice in the past 30 years. Thanks to Mr. Dewitt and his sources for bringing out this unspoken factor. Also, even if Apple's international cash pile is taxed at 30%, the resulting $100 Billion in cash and equivalents is enough for Apple can sustain the current dividend payments for decades without adding a single penny to that cash pile.
Why Is It Down:
- Acquisitions: In December 2012, Freeport announced it was buying oil and gas exploration companies McMoRan Exploration (MMR) and Plains Exploration & Production (PXP). FCX dropped by 15% on the announcement day. This move clearly suggests FCX intends to diversify into the energy sector from being a pure mining play. Whether this turns out to be diversification or "di-worsification" remains to be seen.
- China: China's supposed 'hard-landing' has been like a dark cloud hanging over companies like Freeport. Any talk of changes in Chinese monetary policies sends Freeport and peers lower, as evidenced recently.
- Yield and Dividend Growth: Freeport currently yields around 3.8%, a high number for cyclicals in general. The company has also shown the inclination to return more value to shareholders by increasing dividends every year since 2009. There might not be an increase this year, keeping in mind the acquisition charges.
- Long-Term Technical Support: As this article reports, Freeport's shares have bottomed each time the yield touched the 4% mark. At the current annual dividend of $1.25 per share, the 4% yield point is a share price of $31.2, which is about 5% below the current price of $33.
- Valuation: Freeport is trading at 10 times earnings, while Southern Copper (SCCO) is trading at almost 17 times earnings. BHP Billiton Limited (BHP) trades at 20 times earnings. Granted, SCCO is still a 100% copper play unlike FCX but it is hard to deny that Freeport is cheap whether you see it as a pure copper play or a diversified energy player.
- China (again): Make no mistake about it, Freeport is still a major copper player. The company recently announced that it may double its copper sales to China in the next three years.
Why Is It Down:
- Mitchell Zeller recently took over as the head of FDA's Center for Tobacco Products. He is a well known tobacco regulator and the U.S. tobacco stocks didn't react particularly well after news of his appointment. Lorillard has fallen from a high of almost $43 in February to the current price of $38, a 10% haircut.
- Recent results: If Lorillard's recent 2012 Q4 results are anything to go by, the company is doing just fine. Its market share increased for the 10th consecutive year, reaching 15%. In an industry believed to be way past its growth stage, Lorillard is expected to grow at 10% a year over the next 5 years.
- Dividend increase and Buyback: Lorillard also increased its annual dividend to $2.20 per share from $2.06 per share when it announced the recent results. The current pullback to the $38 level gives Lorillard an amazing yield of 5.7%. Clearly, this is sustainable as the payout ratio is still manageable and the company also buys its shares regularly in the open market. By reducing the total share, Lorillard not only enhances the earnings per share, but also reduces the number of shares eligible for dividend payments.
- Depressed Valuation: Tobacco companies usually have lower valuations, due to concerns over smoking regulations and bans. Lorillard has an extra concern due to its dependence on menthol products. Nevertheless, Lorillard is much cheaper than its competitors as it is trading at a PEG of 1.3, while Altria (MO) and Reynolds American (RAI) trade at 2 and 1.8 respectively. Despite growing regulations, tobacco companies have always maintained their loyalty towards shareholders and we expect nothing short from Lorillard going forward, despite the recent FDA move.
Conclusion: With the indices at such dizzy levels, it is fair for the average retail investor to stay in cash and wait for a pullback. However, we must remember that most funds and institutions always stay highly invested. They may rotate in and out of a few stocks but it is hard to imagine the big boys cashing out all together. The point is, when everyone starts selling their winners that are overvalued, they will start looking for these kind of bargain stocks. You may want to be in such stocks a bit ahead of the crowd. The fact that these stocks also pay (increasing and) sustainable dividends is an added reason to buy names like these.