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Are these 3 beaten up shares a bargain?

Anytime a company’s share price falls, opinions come out of the woodwork. “It’s a bargain” some say. “I told you it was rubbish”, say others. How is a shareholder to know which is the case?

Identify the primary issues that have caused the change in share price.  If these issues are truly the cause of the share price performance, then watching for signs of improvement or further deterioration should give you some clues as to whether the business might be an opportunity or not.

Here is my opinion on the issues that have driven the collapse in the share prices at these 3 companies recently:

Sirtex Medical Limited (ASX: SRX) – down 62% in a year

Sirtex shares have collapsed for one main reason. The company downgraded its earnings guidance and the market is now valuing it at 14 times earnings, on the assumption that it will be unable to grow. Other issues such as the recent mixed trial results or the class action are related, but tangential.

For Sirtex shares to return to previous levels, the company has to either a) grow dose sales, b) bring out or acquire new products or businesses to grow profits, and/or c) re-convince the market that it can become much larger over time and thus deserves to be priced more richly.

Vita Group Ltd (ASX: VTG) – down 73% in a year

Vita shares have collapsed following disastrous negotiations with partner Telstra Corporation Ltd (ASX: TLS), that will see Vita’s remuneration cut by 30% over the next 3 financial years. Vita has narrow profit margins and it is unclear how much they will be impacted. The market has thus downgraded Vita a) because of the remuneration cuts, and b) because it is uncertain how much the business will earn.

Vita shares are currently priced at 4 times last year’s earnings. For them to re-rate they need to either demonstrate some growth, and/or offer greater clarity, perhaps with a profit forecast for next year.

The remuneration cut should lend itself to valuation techniques though, so a well-researched investor who is handy with a spreadsheet could give him- or herself an advantage here.

Myer Holdings Ltd (ASX: MYR) – down 24% in a year

It’s hard to decide which is the issue at Myer. Is it the decade of under-performance, fears of the loss of business to online retailing, or concerns that the department store model is outdated? If I had to pick I would say that sales decline and competitive fears are both equally responsible in the lack of love for Myer shares. The company has a high fixed cost base, and its goods appear to be popularly perceived as more expensive. There is also the issue that huge department stores don’t necessarily lend themselves to foot traffic.

With all of this in mind, I would track the company’s same-store sales performance, profit margins, and management’s efforts to improve them. Weakness in either could suggest Myer is losing to price-driven competition, or that the company is losing business to fresher and more popular/stylish competitors. Same-store sales grew 3% in the most recent annual report, suggesting Myer could be worth a closer look.

In the meantime, discover these 5 'strong and steady' dividend shares with reliable businesses to carry you through a downturn:

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Motley Fool contributor Sean O'Neill owns shares of Sirtex Medical Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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