Casualty List Did Well Last Quarter
Posted: January 17, 2017
Bring that ambulance over here! Each quarter I write about some injured stocks that I think have an excellent prognosis for recovery. I call it the Casualty List.
Based on fourth-quarter price action, I have put Myriad Genetics Inc., Akorn Inc., Hibbett Sports Inc. and PVH Corp. on the Casualty List. They fell in the quarter, even as the S&P 500 marched forward 3.8 percent.
The column you are reading contains my 55th Casualty List. On average, the stocks selections from the first 51 lists have returned 18.1 percent in 12 months. By comparison, the average 12-month gain for the Standard & Poor’s 500 Index was 9.1 percent. All figures are total returns, including dividends and price change.
The Casualty List has been profitable 36 times out of 51, and has beaten the S&P 500 Index 29 times.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
The list from January 2016 gained 38.1 percent, versus 23.6 percent for the index. Green Brick Partners Inc. (GRBK), a homebuilder, led the charge with an 83.9 percent gain. Spirit Airlines Inc. (SAVE) chipped in a 49.3 percent advance.
Polaris Industries Inc. (PII) and China Life Insurance Co. (LFC) were up 11.3 percent and 7.7 percent respectively. I still like Green Brick, in which hedge fund manager David Einhorn has a big stake.
I no longer recommend the other three. Spirit Airlines now appears fairly valued, given that airline stocks may now have squeezed most of the benefit from industry consolidation and reduced fuel prices. Valuations on the other two seem high.
And now for some new casualties.
I’ll start with Myriad Genetics (MYGN), a stock my friend and colleague Tom Macpherson is fond of. In the fourth quarter, it fell 19 percent.
Based in Salt Lake City, Myriad is a leader in genetic testing. Over the next five to 10 years, I expect genetic therapy to come into wider use, and genetic testing is obviously the prelude to such therapy.
The company is pretty small at present. With a market value of $1.1 billion, it just barely qualifies as a mid-sized stock. Its revenue last year was $754 million.
Often stocks with a sexy story sell for high multiples, but Myriad’s valuations are reasonable: 13 times recent earnings, and less than two times sales and book value (corporate net worth per share).
Down almost 20 percent in the fourth quarter was Akorn Inc. (AKRX), a generic drug company based in Lake Forest, Ill. Akorn’s revenue has grown at a 21 percent annual clip the past 10 years. Yet charmingly, the stock sells for just 15 times recent earnings and about 10 times estimated 2017 earnings.
Why is it cheap? Drug stocks in general have been hit by uncertainty over the repeal of Obamacare and by President-elect Trump’s stated desire to bring down drug costs. But in my judgment, generic drug companies like Akorn are a lower-cost alternative, and hence should suffer less.
Hibbett Sports Inc. has increased its revenue at the rate of 12 percent a year for the past decade. Revenue growth in the latest 12 months was about the same. So why was Hibbett down more than 6 percent in the fourth quarter?
I think the company is being tarred with the broad brush that “brick-and-mortar retail stores are dead because no one can compete with Amazon.” To me, that statement is too pat. For many sports items — from baseball gloves to fishing poles — fit and feel are important. To assess that, you must visit the store.
I think Hibbett shares, which sell for about 0.8 times revenue and about 11 times earnings, are a good buy here.
PVH Corp. (PVH), whose initials stand for Phillips-Van Heusen, is one of the world’s largest makers of shirts and other clothing. Its brands include Arrow, Calvin Klein, Izod, Speedo, and Tommy Hilfiger.
The company’s revenue growth has slowed in recent years, but the trend in earnings and cash flow has been good. The stock fell 18 percent in the fourth quarter, as brick-and-mortar stores were struggling and PVH lowered its earnings guidance.
Positive points include valuation (12 times earnings and 0.9 times revenue), strong brands with consumer loyalty and recent heavy buying of PVH call options by speculators.
Disclosure: My firm owns Green Brick Partners for one client, and Myriad Genetics for another client.