Contrarian investors are constantly searching for beaten-up stocks that might offer a shot at some big gains in the next couple of years.
Let’s take a look at Baytex Energy (TSX: BTE)(NYSE: BTE) and Bombardier (TSX: BBD.B) to see if one deserves to be in your portfolio right now.
Baytex
Baytex currently trades for $2.04 per share and doesn’t pay a dividend. Back in the summer of 2014, this was a $48 stock with an annualized distribution of $2.88 per share.
What happened?
The company closed a $2.8 billion acquisition right at the peak of the market that gave Baytex attractive assets in the Eagle Ford shale play in Texas. These properties are the reason contrarian investors might be interested in Baytex, but the company’s balance sheet remains a concern. Baytex finished Q3 2018 with $2 billion in long-term debt. At the time of writing, the company has a market capitalization of $1.1 billion.
Long-term production growth is targeted at 5-10%, and the recovery in Western Canadian Select prices in the past two months should help cash flow in the Canadian operations, which are expected to account for roughly 62% of the company’s 95,000 boe/d production target in 2019. If oil prices can extend the recent recovery, Baytex might be able to boost spending to increase output and have some extra cash to chip away at the debt.
The stock can be volatile, and positive news could send it significantly higher, but investors should keep any contrarian position small. The stock price continues to lose ground, despite the improvements in the oil market, which isn’t a good sign.
Bombardier (TSX: BBD.B)
Bombardier’s plane and train woes are well known, and while management continues to say the company is making progress on its turnaround efforts, the market has decided to take a cautious approach.
Bombardier actually had a nice run in the first half of last year, surging from $3 per share to $5.40 shortly after Airbus took control of the CSeries business. Unfortunately, airlines are taking their time with respect to making purchases of the planes, now named A220.
On the rail side, Bombardier has struggled with delivery delays on contracts, and this has led to some highly publicized customer complaints.
The challenges might have had an impact on some recent lost bids, and investors are wondering if the rail group can recover. In the past year, both Via Rail and Montreal awarded rail contracts to European competitors. South of the border, Bombardier recently won a bid on a light-rail contract with New Jersey, but previously lost deals in Boston and Chicago to a Chinese competitor.
The stock currently trades for $2 per share, giving Bombardier a market capitalization of about $4.9 billion. The company has US$9.5 billion in long-term debt and big chunks of the notes start coming due next year.
Cash flow has to improve if Bombardier is to avoid another liquidity problem. The company received US$2.5 billion in investments from Quebec and the province’s pension fund in 2016.
Is one attractive?
Baytex and Bombardier remain under pressure, and while the stocks might appear cheap, investors should be careful with these names today.
At this point, I would probably search for other contrarian opportunities.
