3 “Fallen Angel” Stocks that Yield up to 15%
If everybody deserves a second chance, then shouldn’t the same apply to stocks?
Most every company faces a major challenge at some point in its history that sends share prices tumbling and yields climbing. A few never recover, but the best ones regain their former luster with time and good decisions by management. Once-strong companies whose shares have plummeted are “fallen angels” and may present enticing investment opportunities as a result of high yields and good potential for share price gains as the company returns to normalcy in the next few months or years.
1. Consolidated Water Co. Ltd. (Nasdaq: CWCO)
Consolidated Water operates seawater desalination plants and water distribution systems in areas where potable water is scarce. The company has operations in the Cayman Islands, Belize, the British Virgin Islands and the Bahamas. Water is supplied under long-term, fixed-price contracts in these lucrative resort markets.
The company’s shares have plummeted 40% in two years and sit just above $7 today. A major cause was a drawn-out legal battle with British Virgin Islands authorities regarding contract prices and improvements to a jointly-owned plant. However, this situation is nearing resolution. Last month, the Eastern Caribbean Supreme Court ruled in favor of Consolidated Water, ordering the government to pay $10.4 million on the water claim and compensate the company for facility improvements. The British Virgin Islands government has 42 days to appeal the verdict.
Consolidated’s earnings grew 18% to $2.3 million in the first quarter of 2012 from $2.0 million a year earlier because of additional capacity provided by the recently expanded Bahamas plant. Consolidated Water is also building a treatment facility in Mexico that will be the largest in its portfolio, able to process 100 million gallons a day. Analysts expect capacity additions to drive 20% yearly earnings growth for the next five years.
Consolidated Water is valued at only 0.8 of book value and yields about 4%. The company has $33.5 million in cash, only $15.5 million of debt and a manageable dividend payout at 68% of earnings. The last dividend increase was a 7% bump three years ago, to a $0.30 annual rate per share.
2. BP plc (NYSE: BP)
Integrated energy giant BP has suffered through tough times because of its lead role in the catastrophic Deepwater Horizon oil spill in the Gulf of Mexico in 2010. BP has spent much of the last 18 months dealing with the fallout, but has made noteworthy progress this year.
Last month, BP settled economic and personal injury claims associated with the disaster for $7.8 billion. While the company still faces litigation for environmental damage, BP has set aside $37 billion to settle these claims.
BP is in the process of selling off $38 billion of assets to pay legal settlements and for other purposes, but has significant new production coming online next year that will more than offset lost production from asset sales. The company has world-class reserves of 18.1 billion barrels and a 19-year record of replacing 100% of production from reserves.
In the last 12 months, BP has delivered EBITDA totaling $42 billion and $24 billion of net profits. Analysts think BP can produce 5% earnings gains in each of the next five years.
BP shares fell about 50% after the spill from $60 to $29, but have since recovered to $37. Dividends were suspended during the crisis, but the company restored payments last year and raised the dividend by 14% this year to a $1.92 annual rate. Shares yield about 5% and payout is modest at 23% of earnings. BP trades at a low price-to-earnings (P/E) ratio of 5 and at a 30% discount to industry peers, which suggests plenty of upside for patient investors.
3. Navios Maritime Partners LP (NYSE: NMM)
This Greek shipping company is a fallen angel due to Europe’s sovereign debt crisis. Navios owns a fleet of 18 ocean-going vessels that transport dry bulk commodities such as iron ore, coal and grain.
Shipping companies have been hurt by Europe’s weak economy, but Navios is faring better than most because of its long-term contracts (averaging four years) and many customers in emerging markets. EBITDA improved 14% to $36.8 million in the first quarter of 2012 from $32.4 million a year earlier, but earnings per share dropped to $0.30 from $0.35 because of dilution from a stock offering. However, analysts forecast 6% annual earnings growth longer-term.
Shares have declined 32% in the last 12 months (mostly, as I said, because of the trouble in Greece), which sent the yield soaring above 15%. Navios has increased distributions four years in a row to the current $1.76 annual rate.
Risks to consider: BP has set aside $38 billion for legal claims, but its liability could be higher. A trial to resolve claims against BP and its drilling partners is scheduled for January 2013. Because it is a micro-cap stock, Consolidated Water may have greater price volatility than the overall market. Navios Maritime Partners is a Limited Partnership and must distribute the majority of its income to investors, which may leave little cash for growth.
Action to take–> My top pick overall is BP. The company is a cash machine, with huge production and reserves while targeting 50% growth in cash flow by 2014. Consolidated Water has more risk, but higher growth, while Navios Maritime Partners is a cyclical play on a recovering European economy.
– Lisa SpringerSource: StreetAuthority
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