Buying beaten down stocks isn't for everyone, but allocating a small percentage of a portfolio to such trades can pay off. Not all stocks that have fallen steeply are worth buying, though. Two initial criteria to look at are price/earnings (P/E) and the forward P/E ratios. These ratios are attained by dividing the stock price by the recent year's earnings and dividing the stock price by the expected earnings over the coming year, respectively. If P/E and forward P/E are near five, there could be some long-term value there. Technical analysis can then be introduced to look for potential buying points that indicate the turnaround may be starting.

Jinko Solar Holdings Co., Ltd. (JKS) has a P/E just above three, and a forward P/E just above four. Over the last three years when JKS has traded below $16.50 it has proceeded to rally above $28. The stock currently trades at $15.92, on stronger earnings than when it traded at higher levels. The price has rallied in December, after hitting a 52-week low of $12.72 in November. Ideally, the price should climb above $17.75 to signal that an uptrend may be starting (meaning the price won't likely fall back below the $12.72 low for some time). A rally to $26, or higher, could well occur over the next year.

The flip side is that the stock traded as low as $2 in 2012 when it went through a period of negative earnings (had positive earnings prior) and investor positivity was very low. 

JKS near support and at attractive P/E

Korea Electric Power Corp. (KEP) formed a support zone between $18 and $19 from mid-2014 through to late 2015. In 2016 the stock rallied to a high of $28.37 in August before collapsing back into the support zone. On Dec. 5 the stock bottomed at $18.40 and trades at $19.72 as of Dec. 9. This major support area is an attractive buy point from a technical perspective, and P/E and forward P/E ratios near three and four, respectively, also make this look like a strong value play from a fundamental perspective. The company has historically paid an annual dividend, which is usually declared late in December. Last year it was $1.37, equating to a 6.9% dividend yield based on current share price of $19.72. The dividend amounts have varied drastically over the years, though, and therefore shouldn't be a major determinant in making a trade decision. Over the next several months the stock could trade north of $22, and over the longer-term well above $24.

KEP at support and attractive P/E

Teekay Tankers Ltd. (TNK) had a long bottoming process near $2.50 throughout 2013 before it rallied to a $8.53 high in 2015. Since the high the stock has slumped, trading as low as $1.90 in November. From a technical standpoint, the time spent below $2.50 was relatively brief, indicating a false downside breakout below the $2.50 support region. The stock has also broken above a descending wedge (often a reversal pattern) which started back in February. This makes a purchase around $2.50 quite attractive, and P/E and forward P/E near four and 4.5, respectively, help give some major backing. The most recent quarterly dividend was $0.03. If that payout continues, the annual $0.12 in dividends works out to a 4.3% dividend yield based on the $2.74 Dec. 9 closing price. The stock could trade above $4, and potentially above $5, over the next one to two years. 

TNK at long-term support and at low P/E

The Bottom Line

There are always reasons why stocks trade at low valuations, but history also shows that buying stocks "on sale" can produce long-term returns. These stocks have all traded near current price levels before, and have also traded well above current levels. That doesn't mean the stock prices can't drop further, but the low valuation of these stocks is likely to attract more buyers over time. "Over time" is key. These stocks have been undervalued for some time, and that hasn't stopped them from falling to current levels, so trades like this require patience. Bullish price action and major support regions indicate buyers have been more active in these stocks recently. To limit risk exposure, only allocate a small percentage of capital to any single trade.

Disclosure: The author doesn't have positions in the stocks mentioned. 

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.