Down 30%, These Stocks Are Ready To Bounce Back

Although the major indexes have moved steadily higher during the past six months, a few dozen companies have missed the boat. 

Of the 1,500 stocks in the S&P 400, 500 and 600, 33 slid more than 30% during the past six months. A 35% slump in Apple (Nasdaq: AAPL) probably qualifies as the biggest plunge that no one saw coming, but many other stocks have blindsided investors as well.

The trouble with these big “losers” is that they quickly get kicked off of most investors’ radars. Burned once, these investors are in no mood for further pain. Yet as Warren Buffett has said on many occasions, the greatest investment gains come from unloved stocks. 

But I’ve taken a closer look at this group, and I’ve found a few potentially impressive rebound candidates worth adding to your portfolio.

1. Cirrus Logic (Nasdaq: CRUS)
As the primary provider of audio chips to Apple, it’s easy to understand why this stock soared in the summer of 2012. Explosive demand for Apple’s iPhones and iPads led to a string of estimate-topping quarterly results, which eventually pushed Cirrus’ stock to $45. But the eventual slowdown behind Apple’s 31% drop has pushed shares of Cirrus down an even sharper 43% during the past six months.

Cirrus’ management realized that an increasingly tight relationship with Apple would eventually lead to such headaches. Apple has represented more than two-thirds of Cirrus’ sales in recent years, which led Cirrus to start spending heavily to branch out into new niches and customer bases. Thanks to robust cash flow and a cash-rich balance sheet, Cirrus’ spending went right into research and development (R&D).

The key to reversing the stock’s downward move is for management to quantify more precisely how increased R&D and customer diversification efforts are paying off. 

During Cirrus’ quarterly conference call in January, President and CEO Jason Rhode’s comments apparently came off as vague to investors, as the stock kept sliding. That’s what makes the upcoming quarterly conference call, slated for April 23, an important one. Rhode has an opportunity to articulate more clearly how the company’s current $100 million in R&D spending is paying off with new customers and new industry verticals.

At the moment, expectations remain quite low. Analysts currently expect Cirrus’ earnings per share to be stuck in the $3.50 to $3.75 range for fiscal 2013 and 2014, yielding a price-to-earnings multiple of about 6. 

2. AK Steel Holding (NYSE: AKS)
Are analysts being too myopic in their outlook for this steel producer? 

Most analysts rate shares as “neutral” with price targets in the $3.50 to $4 range, just above where this stock now resides after falling from $7.50 a year ago and $15 two years ago. 

To be sure, AK Steel has lost money for two straight quarters, thanks to depressed demand and pricing for steel. The company will likely lose money in the first half of 2013 before rising to into profitability later this year. To paraphrase what analysts are saying, its shares simply aren’t timely.

Yet it’s also the case that looking beyond Wall Street‘s quarter-to-quarter myopia to a longer-term horizon can make investors big profits, even if patience is required.

Let’s look at the outlook for AK Steel as seen by UBS’ analysts. Although they rate shares as “neutral,” they see a steady rebound in pricing and demand for steel in 2014 and 2015, which should have an outsized effect on AK Steel’s income statement

For example, revenue is expected to rise 4% in 2014 to $6.03 billion, yet a solid margin expansion should help operating profits to grow more than 50% to $370 million. By 2015, sales should rise again at a mid-single-digit pace, which would push operating income past $500 million, according to UBS. By then, AK Steel would be generating about $1.80 a share in profits. 

Still, although shares trade for just $3, or less than double 2015’s forecast, few are paying any attention. There’s no need to rush out and buy this stock ahead of the company’s upcoming quarterly conference call, as the results and near-term guidance will likely be lackluster. In addition, investors will need to gauge the latest trends on the company’s debt-laden balance sheet to assess whether AK Steel’s cash flow will be sufficient to meet near-term commitments.

But if the balance sheet holds no surprises when its first-quarter results are discussed, then you might want to take action before this stock comes back into vogue. By the time industry conditions improve and analysts become more bullish with their ratings and price targets, shares won’t still be stuck at $3. Even if this stock deserved to trade at just six times projected 2015 profits, then shares would rise to nearly $11, or more than triple the current share price. And that’s still a far cry from the $65 these shares fetched back into 2008, when the steel industry’s dynamics were truly healthy.

Risks to Consider: These stocks have badly burned investors, so any rebound may take some time as investors may be slow to return to the fold.

Action to Take –> If you are looking for new investment ideas with potentially robust upside, you need to move away from the crowd and focus on stocks that most are shunning. As these companies eventually rotate back into favor, analysts — and investors — will be talking up their newly lowered valuations and opportunities to regain lost luster.