Should Contrarian Investors Buy These 3 Troubled Stocks?

Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) and two other $4 stocks are attracting contrarian interest. Is one an attractive bet?

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Contrarian investors are searching for troubled stocks that could offer a shot at some nice gains. Finding the right names at the right price, however, isn’t always easy.

Let’s take a look at three struggling stocks that are getting some attention these days.

Baytex Energy (TSX:BTE)(NYSE:BTE)

Baytex traded for more than $45 four years ago and paid a very attractive dividend. Today, the dividend is history, and investors can pick up the stock for $4 per share.

An ill-timed acquisition saddled the company with an ongoing burden of debt and set the stage for the crash. Baytex has done a good job of staying alive, but the challenged balance sheet is one reason shareholders haven’t seen much upside as a result of the surge in oil prices over the past year.

The company is working through a planned merger with Raging River Exploration that will arguably create a strong company that is better capitalized, but the overall situation is still cloudy unless oil prices can muster a significant recovery, especially the volatile Western Canadian Select (WCS) benchmark.

Why?

The new company will have 34% of its liquids production based on the WCS heavy oil benchmark. WCS trades at a discount to WTI, and the gap has broadened significantly in recent weeks in combination with weaker WTI prices. As a result, Baytex is back down to $4 per share. It was above $6 in May.

If you think new pipelines will eventually allow WCS to trade closer to WTI, and you are of the opinion that WTI oil is headed to US$100 rather than back to US$50, Baytex might be an attractive contrarian bet, but that’s a risky call to make.

Corus Entertainment (TSX:CJR.B)

Corus also trades at $4 and has a significantly smaller dividend than it did coming into 2018. The stock has taken a major hit amid the struggles the media sector faces in competing with streaming services. Revenues are falling in the radio and TV segments, and former owner Shaw Communications is said to be shopping its large stake in the company.

Despite the difficult market conditions, value investors look at the attractive cash flow and see an opportunity for a white knight to come in and save the day. A sale to private equity interests might occur, but investors shouldn’t expect to see a bidding war erupt between the other communications players. They are probably interested, but it’s unlikely the government would allow BCE or Rogers to acquire Corus. In fact, Corus tried to sell some French-language assets to BCE earlier this year, but the companies had to abandon the deal due to objections by the Competition Bureau.

There might be some upside on a takeout, but it is tough to see how Corus is going to solve the problem of falling ad revenues.

Aimia (TSX:AIM)

Aimia is a perfect example of how much upside a takeover bid can produce when the market has pretty much left a stock for dead.

The owner of the Aeroplan point program has been on a downward slide for the past four years, dropping from close to $20 in early 2014 to a 2018 low of $1.50. The stock took a major hit in 2017 when Air Canada said it was cutting ties with Aeroplan to start its own loyalty program. Recently, Air Canada and a few of the banks made an offer to buy Aimia. The offer was rebuffed, but Aimia has held its gains, popping from about $2.50 to $4 per share. The market is either anticipating a sweetened bid from Air Canada or a competing offer from another group.

Recent partner deals announced with Porter Airlines and Air Transat are also helping, but I would be careful chasing Aimia right now.

The bottom line

Sometimes a beaten-up stock can deliver huge gains, and all three of these companies could certainly surge off their current levels under the right conditions. That said, I would look for other opportunities today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker owns shares of BCE.

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