3 Bargain Stocks

Includes: AMSC, CEDC, HGG
by: StreetAuthority

By David Sterman

There are many investing maxims, but my favorite one will always be "love stocks when they're hated." That usually refers to bear 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 shares 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 future.

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 million acquisition 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 market share. (Those price wars have now ended.) In addition, surging commodity costs for grains and other items led to an unexpected jump in expenses.

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 business model, but as regional economies start to rebound, demand for alcohol should as well. When that happens, this business should once again thrive.

Last summer, this stock traded for roughly 25 times forward earnings, 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 (NYSE: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.

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.

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