Investors use various investing strategies, including momentum and value investing. Bottom fishing involves buying stocks at lows to play the recovery. Sometimes, you may inadvertently catch a falling knife. Ultimately, it’s still worth purchasing bounce-back stocks with potential.
While the overall stock market indices are booming, some laggards are near 52-week lows. These stocks have challenges that are making investors skeptical about their fundamentals. As a result, they have underperformed the overall market.
But we all know markets can be inefficient, and stock market trends can create dislocations. For instance, extremely negative sentiment can lead to undervaluation in a stock. Yes, the stock might have fundamental challenges, but the price might be too low and already discounting the challenges.
Typically, if the company resolves the temporary problems, the stock price bounces back. Or it gradually improves its fundamentals, and the undervalued price slowly catches up to intrinsic value.
Today, these three high potential stocks offer the same opportunity. They have established businesses facing operational challenges but have experienced executives to turn things around. These bounce-back stocks are in the bargain bin but won’t be there for long.
Disney (DIS)
After an exceptional 2021, things have ground to a halt for Disney (NYSE:DIS). In 2021 the stock was a Wall Street darling. It had just launched the Disney Plus streaming service, which was growing incredibly. Then Disney theme parks reopened in June 2021, and consumers were happy to take price hikes.
Amid the good news, Bob Iger left at the end of 2021. But this was the start of a tumultuous period. Poorly received strategic changes, a battle with Governor Ron DeSantis, rising rates, and widening streaming losses created the perfect storm.
Eventually, the board had to bring back Bob Iger to handle the situation. Meanwhile, the stock continued its downtrend from the $200 high to the mid $80s, inviting activist pressure.
Since Bob Iger returned in November 2022, the situation has barely improved. The battle with Governor Rob DeSantis has gotten more contentious. And streaming is still losing money, with losses hitting $659 million in the second quarter of fiscal year (FY) 2023.
The challenges don’t end there. Sports rights costs are at record highs, and the legacy cable businesses are declining. All this doom and gloom has left Disney near 52-week lows.
However, this presents an opportunity in one of the best bounce-back stocks. First, Disney has the best intellectual property and talent in the industry. Its studios, including Marvel, Lucasfilm, and Pixar, will continue to produce world-class content.
Secondly, the firm is right-sizing the streaming business and losses are narrowing. As my colleague Josh Enomoto outlined, the firm is laying-off staff and has initiated cost cuts to achieve profitability in the streaming segment.
Finally, with Bob Iger extending his contract through 2026, Disney is in experienced hands to navigate these turbulent times. Once the market gets clarity on the future of ESPN and Hulu, and streaming profits improve, this stock will soar.
AT&T (T)
AT&T (NYSE:T) is also one of the bounce-back stocks hitting 52-week lows. Recent news about potential clean-up costs have increased the pace of deterioration. Indeed, the company’s missteps have never been more apparent, with the stock hitting a 29-year low on July 15.
The merger with Times Warner in 2018 was deemed one of the worst mergers ever and left AT&T with $180.4B in net debt. Luckily, for bottom fishing investors, management has already begun correcting some past mistakes. In 2022, they completed the spin-off of WarnerMedia in a merger with Discovery.
In recent weeks, the stock has declined on negative chatter. First, there were rumors that Amazon might enter the wireless business. Then, Chief Financial Officer Pascal Desroches’s negative commentary that postpaid phone net adds for the second quarter would be in the low 300,000s below the consensus 420,000. Lastly, recent headlines about its contamination exposure have worsened sentiment.
Despite the challenges, AT&T remains one of the top high potential stocks, given the growth in internet usage. The wireless segment has never been in better shape. In the first quarter, it delivered record revenues and profits. Furthermore, AT&T has among the lowest churn, and ARPU is growing. And management forecasts 5% growth in the segment in the first half.
T stock is just too cheap to ignore. It trades at a forward price-to-earnings (P/E) ratio of 6. Moreover, management expects $16 billion in free cash flow in FY 2023. Thus, as of this writing, the stock trades at 7 times free cash flow. Plus, you earn a sumptuous 7% dividend yield as you await the recovery.
Progressive Corporation (PGR)
If you buy car insurance, you might be familiar with Progressive Corporation (NYSE:PGR). The company is the second-largest car insurer in the U.S. After this year’s pullback, the stock deserves a place among your bounce-back stocks.
Like other property and casualty insurers, the company has suffered from rising costs. Auto insurers have come under pressure due to increasing repair costs, more expensive tech-enabled parts, and expensive labor. A steady increase in claim costs is weighing on underwriting profits.
On July 13, the company reported disappointing earnings for the second quarter. While earned and written premiums saw growth, underwriting profits worsened. Net premiums written grew 18% year over year to $14.72 billion. Meanwhile, net premiums earned increased 19% YOY.
However, the rest of the report was a source of concern. The combined ratio was 100.4 compared to 95.6 in 2022. In the personal auto segment, it increased to 99.5% from 95.0%. The combined ratio indicates whether an insurer is generating underwriting profits. A ratio above 100 means it pays more claims than it earns in premiums.
Another poor metric was the monthly sequential decline in personal auto policies. The company lost 8,200 policies in June. Due to the weak policy numbers and combined ratio, shares sold off sharply, falling by 13%. Wells Fargo downgraded the stock to “equal weight,” citing adverse reserve development and negative policy growth.
The selloff presents a bottom fishing opportunity. Progressive is one of the best bounce-back stocks available at a bargain. It has maintained a profitable underwriting track record for decades and is still growing. As the industry navigates these headwinds, it will gain share and emerge from this cycle in a stronger position.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
