One of the most important outcomes of investing is to "buy low and sell high". However, some investors take this the wrong way by thinking that a stock that has been beaten-down can't fall any further. Well, turns out it can.
When looking for cheap stocks, investors need to know why the stock is freefalling. Some stocks trade on solid fundamentals, but unfavourable short-term events cause a sell-off by investors, allowing value investors to sweep up some nice returns.
Then there are stocks that are falling because of poor management and other long-term issues that are difficult to resolve. These are the sort of companies you should try to avoid. Here are two companies approaching 52-week lows that are worth adding to your watchlist.
Atlas Iron: Recently traded at $0.57
Australian junior iron ore miner Atlas Iron (ASX: AGO) has been hammered recently, with its stock price falling almost 110% in the past six months. Atlas Iron's profitability is significantly leveraged to movements in iron ore prices, which have tumbled from US$135 last year to around US$96 this year, causing the sell-off by investors.
I think investors have overreacted to the recent iron ore price struggle, given Atlas Iron's growth and recovery prospects. Atlas Iron has engaged in cost-cutting programs, allowing it to achieve lower production costs of $48.4 per tonne compared with $49.1 per tonne in the previous period. This means that the price of iron ore would have to dip below US$50 per tonne for its profitability to be extinguished.
Furthermore, the major upside for Atlas Iron will come from its potential deal to use rail access to move its iron ore, which would significantly reduce all-in cash costs, allowing it to cope better with lower iron ore prices.
Atlas Iron sits on a price-to-earnings ratio of only 7.6 and holds a very low debt balance, which screams a buy. But be aware, this is not a stock for the feint hearted and comes with substantial risk, but has the potential to provide some strong returns.
Mermaid Marine Australia: Recently traded at $1.97
Having lost almost 100% of its value this year, marine logistics firm Mermaid Marine Australia (ASX: MRM) has felt the pinch. The stock has been recently oversold, given its 29% decrease in profit last year and scepticism surrounding the acquisition of its Singaporean competitor, Jaya.
However, new 12-18-month oil and gas contracts combined with greater market power from its acquisition, should see earnings strengthen in the future. To complement this, further gas exports which begin on the east coast from 2015, should provide long-term tailwinds to support existing earnings.
Trading on a price-to-earnings ratio of 10 and a price-to-book ratio of 1.17, Mermaid Marine looks cheap and assuming it doesn't run into any more hurdles, it should be set for some serious growth in the future.
