Most investors would be aware that the market has been going through a tough period over the past few months but there are a number of stocks that have been punished even more severely.
These beaten down stocks can often provide great buying opportunities especially if they have been sold off for no particular reason except as a result of the broader market sell-off.
Investors do need to be careful however, as many of these stocks may appear cheap but in fact may be a value trap – that is a stock that looks cheap on the surface but the underlying fundamentals are flawed and likely to cause reduced profitability over a long period of time. Recent examples of this include Myer Holdings Ltd (ASX: MYR) and Metcash Limited (ASX: MTS)
With this in mind, here are three stocks that have been beaten down heavily over recent months:
1. Breville Group Ltd (ASX: BRG) – Breville was once a market darling but more recently has struggled to cope with the high expectations the market has placed upon it. Since reaching an all-time high of $9.80 in March 2014, the shares have been in a constant downtrend and are now trading near their 2015 low of $5.63. In the past six months alone, the share price has shed 30% mainly as a result of concerns relating to softer demand for some of its high-end consumer products in the domestic market where consumer confidence has been soft for a number of years. Investors should note however, that Breville's operations in the US market have rebounded strongly and this is expected to continue for the next 12 months or so. It is also important to note that Breville's FY15 results were only marginally lower than the previous year, but still well below what the market would have been expecting a couple of years ago. At the current share price, I think Breville is still over-valued, trading at nearly 16x FY15 earnings with no clear earnings visibility.
2. Genworth Mortgage Insurance Australia (ASX: GMA) – Genworth is Australia's leading lenders' mortgage insurance business with a sizeable market share despite losing a key contract with Westpac Banking Corp (ASX: WBC) earlier in the year. Since then, the shares have lost nearly 48% of their value and are trading at all time lows. There is no doubt that the shares appear cheap, trading on a single-digit multiple and a double-digit dividend yield but I think investors need to be cautious. Interest rates in Australia are at record low rates and this has helped to keep delinquency rates low. This is an obvious tailwind for a company like Genworth, but if households are unable to keep up with mortgage repayments once rates rise, Genworth could find itself in some difficulty. Genworth is a high risk stock and best left to investors with a very high risk tolerance.
3. Iluka Resources Limited (ASX: ILU) – Iluka has been a disappointing performer in the resources sector for a number of years as the demand for its mineral sands products has dropped at the same time as supply has increased. Its key customers include China and some of the major European economies and the slowdown in these economies over recent years has seen the share price fall by around 70% since 2012. The more recent fears surrounding global growth have also weighed heavily on the share price, with more than a 30% decline over the past four months alone. Taking into account the recent share price decline, Iluka still appears to be over-valued. The company produced a first half 2015 net profit of just $20 million and to put this into perspective, Iluka's current market capitalisation is $2.5 billion. There is no doubt that Iluka is a well managed company, but it has a number of variables outside of its control and this makes it hard to forecast when mineral sand prices will recover. As a result, I think investors should keep Iluka on their watchlists for now.
Are you looking for a company with positive earnings momentum that is trading at a significant discount?
