After only a couple of slightly rocky days, low and behold the market has jumped to a new five-and-a-half-year high. As market strategist Chris Weston observed in a Business Spectator article “only 21% of the market are 5% or less from a 52-week high” – the statistic suggests there is room for the market to test further highs.
I’ll leave guessing the direction of the market to others. While some may find they can accurately time the market, a strategy of focusing on buying stocks priced below their intrinsic value has been proven to work over the long-term despite the vagaries of the market.
While there are a number of stocks trading around 52-week highs that could still warrant buying and although the ‘new lows’ list can be a dangerous place – because often there are value traps aplenty – there are also opportunities amongst beaten-down stocks.
For starters, here are two decent companies that have both just touched new 52-week lows.
The company behind well-known brands such as Bonds, Sheridan and Hard Yakka is Pacific Brands Limited (ASX: PBG). The stock is down 44% in the past 12-months after touching a new low of 49 cents. While the brands are good they do face stiff competition from overseas entrants and a difficult retail environment. A careful analysis and valuation of the company however suggests that these negatives are more than fully reflected in Pacific Brands’ current share price.
The potential for corporate activity as a catalyst for the share price also shouldn’t be overlooked. With the chance of Solomon Lew and his team at Premier Investments Limited (ASX: PMV) lobbing a higher bid for David Jones Limited (ASX: DJS) unlikely in my opinion – there has previously been speculation that Premier was interested in DJs – a more appealing turnaround opportunity and certainly a lower priced one would be for Premier to make a play for Pacific Brands. There would be the potential for synergies with the current Premier stable of brands – albeit introducing a wholesale element – and importantly a takeover would also allow Lew to install his own high quality managers into the apparel maker.
Like Pacific Brands, Patties Foods Limited (ASX: PFL) also has an impressive portfolio of highly recognised brands. Rather than socks and jocks however, Patties sells frozen pies and pastries under brands such as Four’n Twenty and Nanna’s.
The pressure from the dominant supermarket chains and the competition of ‘home brand’ products hasn’t made life easy for Patties with sales and earnings per share dipping in recent years. With the outlook for the second half to “at least match last year’s second half underlying NPAT”, Patties may now have stabilised its earnings base.
While both firms operate in low growth markets and have their challenges, shareholders can enjoy above average dividend yields from the stocks while they wait for earnings to improve and a potential re-rating in the stocks to occur.
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Motley Fool contributor Tim McArthur owns shares in Pacific Brands Ltd.