As equity market sentiment remains largely bullish, it’s a challenging task to find oversold stocks. However, in any market condition, there are names that have declined sharply or are trading at compelling valuations.
This column will discuss three beaten-down stocks to buy now. Industry headwinds are the primary reason these stocks will remain depressed.
However, I believe that a turnaround is likely soon and these names can surge higher in the coming quarters.
- Transocean (RIG)
- Altria Group (MO)
- Tilray (TLRY)
Let’s look at these beaten-down stocks.
With the decline in energy prices, offshore drilling has taken a hit. There have been few bankruptcies in the offshore drilling sector. However, Transocean (RIG) is one of the beaten-down stocks to buy now that has survived. In the last year, RIG stock has declined by 69%. As oil gradually trends higher, I believe that RIG stock can be considered.
The first reason to like Transocean is the fact that the company still has an order backlog of $9.6 billion. Further, 94% of the backlog is with investment grade companies. This provides cash flow visibility for the medium-term even as the EBITDA margin is likely to remain relatively depressed.
The second reason to like Transocean is the company’s strong liquidity profile. As of March 2020, the company reported total liquidity of $3.1 billion. This will help the company navigate the current headwinds.
It’s also worth noting that offshore break-even oil price has been declining over the years. For the current year, offshore break-even is expected at $34 per barrel. This is positive for Transocean as offshore drilling activity can increase even at $50 to $60 per barrel oil.
From an asset perspective, Transocean has an advanced rig fleet with a high concentration of ultra-deep-water assets. Once the offshore drilling market recovers, the company’s rigs are likely to see strong demand.
MO stock (MO) is a fundamentally strong name that deserves a place in the portfolio. Having declined by 21% for year-to-date fiscal year 2020, MO stock is trading at compelling valuations. At a price-to-earnings-ratio of 9.2, the stock is attractive. The stock has a dividend yield of 8.56% and the high dividend pay-out is sustainable.
One of the key reasons to like Altria Group is the company’s development of FDA-authorized non-combustible products. This includes products like moist smokeless tobacco, oral nicotine pouches, heated tobacco, and e-vapour.
As these products enter the market, the weakness in the combustible product business is likely to be offset. At the same time, the company’s brands such as Marlboro will continue to deliver cash flows in the combustible product segment.
Therefore, Altria Group is in a transition phase and renewed growth is likely in the coming years. I also believe that the company’s investment in Cronos Group (CRON) is likely to deliver results in the next five years. The cannabis market will take time to gain traction, but the investment is far from being a failure.
Cannabis stocks have been on a sustained decline since March 2019. TLRY stock (TLRY) has plunged by 83% in the last year. After the big decline, I believe that the stock is interesting at current levels.
Tilray already has a presence in Canada like many other cannabis companies. However, the company’s focus on Europe is likely to be positive for the long-term. Tilray already has cultivation, a distribution agreement, and sales offices in Europe. Once sales gain traction, the European Union is likely to be the company’s biggest market.
From a product perspective, the company has several brands and product offerings. Products such as edibles, vapes, CBD-infused tea, and potentially THC beverages will help in sales growth and EBITDA margin expansion.
In the medical cannabis business, the company has 10 clinical trials. Evidence backed medicinal cannabis is likely to deliver growth in the next few years. The company is also establishing a strong base with 12 pharmaceutical distributor relationships. This includes a global agreement with Sandoz.
With the company targeting positive adjusted EBITDA towards the end of the year, it makes sense to consider some exposure to TLRY stock. As cash burn declines and the market gains traction, the stock is likely to trend higher.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
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