3 Unloved Gems From The Bargain Bin

David Sterman's picture

Thursday, April 10, 2014 - 10:15am

by David Sterman

It usually pays to track which stocks are making new 52-week highs and new 52-week lows.

The new highs provide insights into what is working in the investing sphere at the moment. Scanning the list of new lows can help you spot which stocks are being deeply shunned by the crowd.

But in recent years, it's hardly been worth the effort. It seems that most stocks and sectors have been moving to new highs, quarter after quarter, and the list of new lows has been isolated to a handful of true dogs.

However, the times are changing: This week alone, we've seen more than 150 stocks make fresh 52-week lows. And buried among them are some high-quality companies that are simply enduring a temporary rough stretch.

For farsighted investors with the patience to see such beaten-down stocks regain their footing, the upside could be significant. At a minimum, their downside is likely more muted, as any remaining bulls have been shaken out. Here are three I'm tracking right now.

1. Chart Industries (Nasdaq: GTLS)

This company's ticker symbol, which is a reference to gas-to-liquids, represents Chart's strong positioning in the field of liquefied natural gas (LNG). Thanks to strong demand for the company's LNG storage tanks and related ancillary equipment such as LNG-capable tubing and heat-exhangers, sales have nearly doubled from $600 million in 2009 to $1.17 billion last year. 

Investors grew especially excited about the company's burgeoning opportunities in the field of LNG-powered trucks and trains. Shares surged to new all-time highs last fall in anticipation of accelerating sales growth -- but those expectations now look premature. It will take some time for those transportation markets to fully develop, and analysts have had to trim their growth forecasts. 

For example, earnings per share (EPS) had been expected to reach a record $4 this year and $5 in 2015, but those estimates have come down by around $0.75 each year. Still, this is a company poised for mid-teens sales growth this year and next, and sales may grow at an even faster pace after that as operations in China expand: Chart expects to double its China-based output in 2015. At maturity, analysts at Lake Street Capital see Chart generating $2.5 billion in annual sales and $8 in EPS, and see shares rising to $114.


2. Procera Networks (NYSE: PKT)

This company sells software that can analyze packets of data in corporate networks for any malicious code, in a field known as deep packet inspection. Allot Communications (Nasdaq: ALLTand Canada's Sandvine are the industry leaders, with 35% market share each, and Procera controls roughly one-fourth of the market.

Procera had been in the midst of a solid growth spurt, with sales rising at least 25% in each of the past three years. But the company's exposure to the cable market has come back to bite it: Comcast's (NasdaqCMCSAmove to acquire Time Warner Cable (NYSE: TWC) has led to an industry pause in capital spending. Procera's sales growth will likely slow to 15% this year, half the rate that analysts had been expecting a few quarters ago. Shares, which traded above $15 as the year began, have moved below $10, to the lowest levels in 30 months.

Yet Procera has some clear positives: First, net cash makes up more than half of the value of this stock. Second, the importance of clean-running data traffic will only increase in the longer term as services like Netflix stream over global networks. Analysts at D.A. Davidson figure that "the changing dynamics of Net Neutrality (will) eventually work in PKT's favor, and should drive a reacceleration of revenue growth above 15% in 2015." Their $13.50 price target represents 40% upside.


3. Forestar Group (NYSE: FOR)

I've long been a fan of this hybrid real-estate/oil-and-gas firm. When I profiled it in early 2013, I noted that this was really more of an asset play than an earnings play, as many of its assets are carried on the books at little cost -- but can either produce cash flow or be monetized through sales as management desired.

Though shares initially moved higher in 2013 on hopes of a rising pace of new home construction, a cooling off period in housing has pushed shares to recent 52-week lows. 

From an operational perspective, Forestar's business is developing well. On the company's fourth-quarter conference call, management noted a solid pace of oil output, along with a steady pace of real estate sales. In light of an expected eventual strengthening in the pace of new home construction, along with still-firm oil prices, this share price pullback has created a nice re-entry point.

Risks to Consider: When a stock hits a 52-week low, it can stay off the radar for a while, so these will make better longer-term investments than short-term trades.

Action to Take --> Though it is hard to spot 2014 catalysts, all three of these firms appear poised for solid results in 2015 and beyond, making this a good time to give them a fresh deep look while the rest of the crowd is shunning them. 

P.S. The only thing better than investing in high-quality companies is investing in high-quality companies that return money directly to shareholders. In our latest research, we've found 13 market-dominating companies that have been hoarding billions in cash since the financial crisis -- and they're set to pay out $39.5 billion in dividends in 2014 alone. And that's just the beginning. To get access to the names and ticker symbols of some of these companies, simply view this special report.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.