3 Incredibly Cheap Stocks Could be the Best Rebounds of 2013

It’s always helpful to keep an eye on losing stocks. Whether it’s a scan of the stocks making fresh 52-week lows, or a screen for stocks that have fallen sharply in recent quarters, you may come across tomorrow’s winning trades.

Case in point: Shares of Netflix (Nasdaq: NFLX), which saw its shares slump from $300 in the summer of 2011 to just $60 a year later. Snapping up this losing stock in the fall of 2012, when most investors were fleeing, turned out to be a wise move as shares have rebounded a stunning 200% — in less than five months.

The 10 Worst Performers of the Past 12 Months*

 *representing stocks in the S&P 500 and S&P 400 

Here’s a look at three deeply-bruised stocks that have serious rebound potential in 2013. 

1. Cliffs Natural Resources (NYSE: CLF)
In October 2012, I profiled three stocks that possessed a solid mix of growth, income and value.

And while Bunge (NYSE: BG) and Principal Financial Group (NYSE: PFG) have each risen nearly 20% since then, mining firm Cliffs Natural Resources has seen its stock fall roughly 8%.

Management will discuss quarterly results on Wednesday, Feb. 13, when you’ll hear a lot about recent decisions to write off a number of balance sheet assets. Book value stood at $6.3 billion before those write-downs, but likely still stands above the current $5.2 billion market value

Equally important, management is expected to reiterate its commitment to the current dividend. Some investors were expecting the $2.50 a share payout to be slashed, but as the dividend looks increasingly safe, investors will likely take note of the current juicy dividend yield of nearly 7%

2. Deckers Outdoors (Nasdaq: DECK)
This maker of footwear and apparel saw its shares plunge 74% from late 2011 to about $30 a year later. A recent rebound to $42 doesn’t begin to reflect the potential for this one-time highflier.

The turnaround is predicated on a second-life for the company’s UGG line of winter boots, which accounts for more than 80% of company sales. Investors grew concerned that these high-end products represented a fad that had ended.#-ad_banner-#

You can see those concerns right on the company’s bottom line: earnings fell nearly 34% from 2011 to about $3.30 a share in 2012 (full-year results will be released on Tuesday, Feb. 19). But it looks to have been premature to write off the UGG line of boots. They still likely accounted for roughly $1.2 billion in sales in 2012, and based on recent ordering trends, sales should be modestly higher in 2013. 

In addition, the price of sheep-skin, a key raw material, is coming back down after a sharp spike a year ago (which partially explains the profit drop in 2012). Although analysts predict company-wide sales will grow a modest 5% in 2013 (to roughly $1.5 billion), they expect the lower sheep-skin costs to help earnings grow more than 10% to nearly $3.70. Shares trade for just 11 times that forecast.

To be sure, this stock is unlikely to revisit the $100 mark any time soon. The days of robust top-line growth have likely passed. But as the UGG boots hold their own in the United States and continue to gain traction in (frigid) emerging markets, this company is likely to produce steady top- and bottom-line growth. The now-reasonable forward multiple has created a solid entry point for long-term investors.

3. Joy Global (NYSE: JOY)
This manufacturer of mining equipment was riding high a year ago on the heels of a robust outlook for commodity prices and international mining trends. Yet during the course of 2012, it became increasingly apparent that many mining firms planned to throttle back capital spending in the near-term to boost free cash flow. This sentiment has pushed this stock down from $90 a year ago to a recent $60.

It’s crucial to think of Joy Global as a “late-cycle” play as its order book always rises sharply when the global economic outlook strengthens (leading to an upsurge in mining activity in tandem). Still, it’s easy to fixate on Joy Global’s near-term challenges: Per-share profits are expected to fall roughly 15% in 2013 to about $6.25. Yet analysts at Goldman Sachs predict that “tightening commodity supply-demand balances over the course of 2013 will drive visibility on a modest 2014 capex recovery.” They expect earnings to rebound to above $7 a share in fiscal (October) 2014.

And as we head toward mid-decade, this “late cycle” play should really start to hits its stride. Goldman sees earnings per share approaching $9. 

Joy Global’s technical picture may be brightening a bit as well. Shares appear to have bottomed around $50 in the summer and have been moving into a higher trading range. Look for more details on the near-term and long-term outlook from management when 2013 fiscal first-quarter results are released at the end of February.

Risks to Consider: All three of these stocks must post a string of solid quarters before investors will regain trust, so they may take some to rebound.

Action to Take –> As Warren Buffett often notes, you only make money in unloved, out-of-favor stocks. Each of these stocks were in vogue just a year or two ago, and simply can’t be written off as long-term losers. When each of these companies delivers quarterly results in coming weeks, investors will have a fresh chance to assess their prospects, and perhaps jump in before the crowd returns.