Investors worried about overvalued equity markets amid trade-war fears and forecasts that the long bull market may be coming to an end need to screen carefully for hidden gems. A good place to look is stocks that have been beaten down but are showing strong underlying fundamentals, such as robust sales growth and improving gross margins. That’s exactly what MarketWatch did in a recent column, coming up with 17 of the year’s worst performing stocks that nonethelss have fundamentals which are improving.
A selection of ten out of that group includes Coherent Inc. (COHR), C&J Energy Services Inc. (CJ), Thor Industries Inc. (THO), Exilixis Inc. (EXEL), Electro Scientific Industries Inc. (ESIO), Patterson UTI-Energy Inc. (PTEN), Celgene Corp. (CELG), Parker-Hannifin Corp. (PH), Nektar Therapeutics (NKTR) and Albermarle Corp. (ALB).
Robust Sales Growth
|Stock||Sales Per Share Growth in Past 12 Months|
|C&J Energy Services||154%|
To find the year’s worst-performing stocks, MarketWatch began with the S&P 1500 Composite Index, comprised of all S&P 500 stocks as well as all those in the S&P 400 Mid Cap Index and S&P 600 Small Cap Index. Setting a 20% threshold level, they found 104 stocks that had fallen by more than that since the start of the year, including reinvested dividends.
Out of that group, 81 of the companies had seen their sales per share improve over the most recently reported 12-month period from the previous year 12-month period, and 29 companies had increased their gross profit margins during that same time. Finally, 17 out of those two groups had improved both sales per share and gross margins during the most recently reported quarter compared to the previous year.
The combination of extremely poor stock performance amid improving fundamentals could be a sign that investors have overreacted, leaving some bargain opportunities on the table. We take a closer look at two of those potential bargains below. (To read more, see: 4 Bargain Stocks To Protect The Downside.)
This biopharmaceutical company that specializes in the discovery and development of drug candidates for cancer, auto-immune disease and chronic pain is down 21% this year. In the most recent reported quarter, sales per share were up 47% to $0.24 compared to sales per share a year earlier. The company’s gross profit margin—gross profit (i.e. sales minus cost of goods sold) as a percentage of sales—increased by nearly 10% to 82.52% in the most recent reported quarter versus the previous year.
One of Nektar’s key growth drivers is expected to be its NKTR-181 opioid therapy drug, if it is approved. As much as 82% of sell-side analysts have a ‘buy’ rating on the stock, according to MarketWatch. (To read more, see: Is Nektar Therapeutics Still a Good Bet Despite the Correction?)
This manufacturer of recreational vehicles is down nearly 34% on the year. However, sales per share were up 12% to $42.60 in the most recently reported quarter compared to a year earlier, and the company’s gross profit margin was up nearly 2% to 16.61% in the most recently reported quarter compared to the previous year.
About three weeks ago the company announced plans to pay off its revolving credit facility and that it would buy back $250 million of common stock over the next two years, boosting returns to shareholders. Among sell-side analysts, 82% have a ‘buy’ rating on the stock.