Buying shares that are unpopular may not sound like a good idea to many investors. After all, falling share prices can be persistent, since it’s often difficult for a catalyst to be big enough to fundamentally change the direction of a stock price.
However, unloved stocks can offer turnaround potential. They may provide a wide margin of safety which enables an investor to buy low and sell high. With that in mind, here are two stocks that have fallen in the last year but which could prove to be excellent recovery plays.
Reporting full year results on Wednesday was silver and gold miner Hochschild (LSE: HOC). The company’s performance during the year was impressive, with record production helping to drive revenue higher. Sales increased by 5% to $722.6m, with full-year attributable production of 513,598 gold-equivalent ounces exceeding previous guidance.
Costs, though, increased as expected. While in line with guidance, the all-in sustaining cost per silver equivalent ounce was $12.30. This was up from $11.20 in the previous year and meant that earnings per share slipped to $0.08 from $0.09 last year.
Hochschild’s outlook appears to be somewhat uncertain at the present time. It continues to make progress with its strategy and is on track to produce 514,000 attributable gold equivalent ounces in 2018. Its bottom line is due to increase by 36% in the next financial year, which puts it on a price-to-earnings growth (PEG) ratio of just 0.7. However, with investor sentiment towards the silver and gold mining sector being weak, the stock’s price has fallen by 19% in the last year.
This could mean further falls are ahead in the short run. But in the long term, the company appears to be cheap and performing well. As such, it could generate high capital returns.
Also disappointing in the last year have been shares in gold and silver miner Fresnillo (LSE: FRES). Its shares are down 11% in that time, with gold price rises being offset by a falling silver price. Still, the company is forecast to post a rise in its earnings of 8% in the current year, followed by growth of 14% next year. This puts it on a PEG ratio of 1.6, which suggests that it offers a wide margin of safety.
Furthermore, the company appears to have significant income potential. It may have a dividend yield of just 1.8% at the present time, but it has scope to rapidly increase shareholder payouts. Dividends are covered 2.2 times by profit and this means that they could increase in line with earnings over the medium term without hurting the financial performance of the business.
Clearly, the outlook for gold and silver prices is uncertain. However, if a bear market does come into being after the recent stock market correction, Fresnillo’s exposure to gold could make it more popular among investors.
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Peter Stephens owns shares in Fresnillo. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.