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3 Bargain Stocks that Emerged from the Market's Slump

The opinions expressed by columnists are their own and do not necessarily represent the views of

Volatility is back. The markets slumped badly at the end of last week and have rallied considerably higher thus far this week. From solid corporate earnings to tepid economic reports to deepening troubles in Europe, there's a whole lot of push and pull going on right now.

Consider this fact: The S&P 500 has fallen at least 1% on four occasions this month alone. It happened only once in March and not even once in February. That's actually good news for value investors: each sell-off has brought a fresh list of bargains, as the list of 52-week lows starts to grow larger.

This week, I've come across a handful of solid long-term businesses that have touched fresh 52-week lows in the past few trading sessions. I've been tracking these companies over the years, awaiting the moments when they temporarily fall out of favor. They're in the doghouse once again, and now look inexpensive in the context of their long-term track record.

1. Barrick Gold (NYSE: ABX)
This leading gold miner has bounced around between $45 and $55 for much of the past two years, but has recently fallen below support levels. My colleague Tim Begany wisely suggested investors dump this stock back in November, although the sell-off now looks complete. This stock is now looking a heck of a lot more appealing.

Begany correctly noted that Barrick's costs were spiraling, but it's even worse than he thought. At the time he wrote his article, Barrick's cash cost per ounce of gold was expected to have reached an all-time high of $482 in the fourth quarter, but the figure actually climbed to $505. Adding insult, management conceded that cash costs per ounce in 2012 would rise to at least $520 and perhaps as high as $560. (The company also mines copper at about $2 a pound.)

Yet with gold trading at around $1,640, Barrick is still generating solid profits: The company is likely to earn about $5 a share this year and $6 a share in 2013, assuming stable gold prices. Costs will remain a problem, but Barrick remains on track to boost output as its key mines hit their stride, which explains the rising earnings per share (EPS). A fairly high level of depreciation means cash flow per share will be roughly 20% to 30% higher in each of those years.

Merrill Lynch rates shares a "Buy," with a $64 price target -- more than 60% above current levels using gold at $1,400 over the next five years in its core assumptions. So gold could pull back $200 from current levels without impacting that target.

2. Polycom (Nasdaq: PLCM)
This provider of audio and video-conferencing systems has felt the pain of rising competition and a slowing global economy, pushing its stock down from $33 last summer to a recent $12. Ouch.

Investors are smarting over the fact that a former steady grower is likely to see sales flatten at around $1.5 billion this year. Margin pressures will likely cause EPS to drop more than 20% to around $0.95,  perhaps before rebounding at a double-digit pace again in 2013 -- if European and Asian demand start to bounce back.

As is the case with any company facing near-term headwinds, it may be several quarters before sales -- and the stock price -- start to rebound. That said, this former growth stock now looks like a deep value stock -- shares sport a single-digit P/E multiple if you back out the $3.42 a share in cash.

It's not as if this business is in trouble. Polycom still managed to ink more than 600 deals in the first quarter worth at least $100,000 each. A number of companies are installing these high-tech pricey solutions in order to cut down on business travel (though a large number of companies are also deferring this non-essential spending). Cisco Systems (Nasdaq: CSCO) is taking some market share, thanks to a broader bundled solution, but the entire industry is expanding fast enough to turn this company back into a growth stock later this year.

3. Modine Manufacturing (NYSE: MOD)
This maker of heating and cooling systems for trucks, farm equipment, construction equipment and buildings is feeling the pain of a slowdown in Europe. Sales likely grew only 10% in the fiscal year ended last month (to around $1.6 billion), and will likely grow at just half that pace in the fiscal year that just began. Just a few quarters ago, management had noted that a range of streamlining initiatives could push EPS up to $1 in the fiscal year just ended, but the renewed sales weakness will likely shave that goal by about $0.25.

Analysts expect EPS to finally move higher in the current fiscal year (April 2013) to roughly $1.15, but I'm guessing that's too optimistic. A $0.90 a share profit is looking increasingly likely, and true earnings strength won't likely be in evidence until the fiscal year that begins next April.

Still, this is an awfully cheap stock, trading just below book value and for around seven times what profits will look like in a more stable economic environment. Insiders jumped the gun, though, buying into the stock last summer and winter at around $10 a share, and may look to wade back in again now that shares are below $8.

Risks to Consider: Stocks hitting 52-week lows represent better values than they had before, but can often take several quarters or more to reverse course.

Action to Take --> In an uncertain market, it pays to focus on stocks that don't have a high degree of expectations already embedded in their valuations. That appears to be the case with these three stocks, all of which have slumped badly in recent months.

[Note: If you haven't heard about this unique opportunity, then I want to tell you about it now. StreetAuthority has staked me with $100,000 of real money to invest in my absolute best ideas. For a limited time, you'll be able to follow along with me completely free. Go here to learn more.]

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of CSCO in one or more if its “real money” portfolios.

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