Stocks ebb and flow. But, let’s face it — sometimes the bearish ebbs and bullish flows are simply overdone, taking those stocks well beyond reasonable (read: sustainable) levels, and setting up reversal opportunities.
The past three months have been a decided bearish ebb, with the S&P 500 sinking more than 20% from its high to its low. A handful of stocks, however, have tumbled a much greater distance — distance one might consider overdone, and unsustainable. In fact, these stocks are so oversold at this point, they might be poised to rebound regardless of whether the market does from here. And in some cases, those rebounds appear to be already under way.
Here’s a look at three of these undeserving victims of — and only of — rampant fear.
Apache
Click to Enlarge The drastic pullback in oil prices back in August wasn’t difficult to understand. Investors truly thought we were entering a global recession, and as such, demand for oil was bound to plummet as it did in late 2008. That’s not to say the assumptions were correct — just understandable. Within the last few days, though, that same assumption is starting to be questioned, with crude prices rising more than 5% above Tuesday’s low.
One of the hardest-hit names stemming from oil’s pullback was independent oil and gas player Apache (NYSE:APA); shares fell more than 43% between July’s high and October’s low.
Were Apache not a proven and consistently profitable company, such a dip might make sense. Even when things were at their darkest in late 2008 and early 2009, though, this explorer still managed to turn a profit. Oh, it was small, but even a small profit then was a relative victory, and the odds of another turnaround that strong catching any oil company off-guard again are pretty slim.
The sharp V-shaped bottom made this week suggests the market finally figured out that APA is undervalued, even in the worst-case scenario. A forward-looking P/E of 6.7 is low — even by energy stock standards.
Xerox
Click to Enlarge After a 39% tumble from July’s peak to October’s trough, chances are good that Xerox (NYSE:XRX) broke the spirits of even the most die-hard fans and owners. After all, the stock didn’t even recover half of what it lost in 2008 when things perked up in 2009 and 2010. To implode before it ever even got a chance to fully heal had to have been psychologically deflating. And bluntly, given the cyclical nature of printers and copiers, even a mere economic slowdown could be a threat to Xerox Corporation.
Sometimes, though, the best entry points are when the whole market has given up on a stock.
Like Apache (and the rest of the market, for that matter), Xerox shares formed a rather sharp V-shaped reversal effort beginning Tuesday. Unlike the market’s average stock, though, after nearly a 40% drubbing, XRX is priced at a mere 6.5 times its projected 2012 earnings of $1.22 per share. For perspective, 2009’s (when the economy was more than struggling) earnings still rolled in at 60 cents per share. Assuming the absolute worst — a repeat of 2009 — the stock still would be priced quite palatably at a P/E of 12.0.
3M
Click to Enlarge In early July, a 30% plunge was likely the last thing any 3M (NYSE:MMM) shareholders were expecting. That’s what they got by early October, though. However, this tide might have turned this past week as well, as investors realized the most diversified company in America is waste-deep in consumer staples lines as well as business staple lines. It makes everything from computer screens to bandages to tape to insulation to pet supplies, and more. Not much of it, however, is highly cyclical.
Nevertheless, down MMM went — and up went its dividend yield. The current yield now stands at 3% — a dividend 3M has increased for 53 consecutive years now, and it actually can afford the dividend.
Between a needless nosedive from the stock, stunningly reliable dividend growth, a forward-looking P/E of 11 and investors now collectively realizing the world isn’t going to end, 3M is a great value proposition.
Bottom Line
To be fair, an economic stumble might well eat into the bottom lines of these companies. But each is far better shielded from that struggle than their recent stock charts give them credit for. Now that the sellers have overreacted, savvy investors can find long-term holdings at bargain prices.
