Up a Lot and Still Looking Good
Posted: May 30, 2017
Back in 1967, Ira Cobleigh wrote a book titled Happiness is a Stock That Doubles in a Year.
That title summarized the feelings of a lot of people. There are few sensations better than seeing your money double in a reasonably short time.
Stocks that have doubled in a year are often too pricey for me. But back in 2001 I started writing occasional columns on stocks that have doubled and yet are still attractive.
Over the years, I have written nine such columns. My recommendations have been profitable seven of nine times, and have beaten the Standard & Poor’s 500 stock index six times.
The average one-year return on my “Doubled and Still Attractive” recommendations has been 17.7%, versus 11.5% for the S&P 500 over the same periods. All figures are total returns including dividends.
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.
Last year I made a departure from previous practice, and wrote about stocks up 50% or more, rather than 100% or more. (There were some stocks up 100%, but I didn’t like any of them.) This year, there are more big gainers to pick from, and I’m returning to my previous threshold of 100%.
My picks from a year ago mostly did well. Career Education Corp. (CECO), which I don’t admire but thought was severely undervalued, rose 63%. Eldorado Resorts Inc. (ERI) chipped in a 38% return. And Global Brass & Copper Holdings Inc. (BRSS) was up 13%.
Averaged together, the three stocks I picked a year ago returned 38.2%. By comparison, the S&P 500 returned 17.6%.
Now let’s have a look at a few new stocks that were up 100% in the past 12 months, and yet in my judgment still have some juice left in them.
A lot of energy companies went bankrupt in 2015 and 2016. Sandridge Energy Inc. (SD) was one of them. Upon emergence from Chapter 11 last fall, the company’s stock jumped from 1.4 cents a share to about $19, where it remains.
Of course, the gain from that spurt went to the old bondholders who received stock in the bankruptcy, not to the original stockholders.
Most of the (very few) analysts who follow the stock are optimistic enough to call it a buy. They expect a profit of about $1.16 a share this year and $1.68 next year. At present, Sandridge stock trades below book value (corporate net worth per share).
The energy industry’s recovery won’t be easy. But I think there is room for some gains here.
Maui Land & Pineapple Co. (MLP) hasn’t actually grown pineapples since 2009. It is a real estate development company in Hawaii, and the operator of the Kapalua Resort, where the Professional Golfers Association (PGA) tour starts each year.
The stock has climbed from about $6 a year ago to about $17 now. Earnings have been very strong lately, thanks to some big sales. But over the years, the company’s profits have tended to be erratic. That’s why the stock still sells for only 11 times earnings, despite the recent profit surge.
Cloud Peak Energy (CLD) is a coal company, and coal companies are fighting for their life. Environmental regulations make it harder for utilities to burn coal than in the past, and cheap natural gas makes it unnecessary for many of them to do so.
Analysts expect Cloud Peak to swing to a loss this year after reporting a profit in eight of the nine previous years. They expect another, though narrower, loss in 2018.
Working in the stock’s favor are its cheapness (0.26 times book value, or corporate net worth per share) and the stated intention of the Trump administration to help the coal industry get back on its feet.
Cloud Peak shares were above $21 before the big slide in energy prices started in 2014. They fell to below $1.50 early last year, and currently languish below $4. One need not think that coal is the industry of the future to think that this stock is attractively cheap.
In conclusion, stocks that have soared, or even doubled, may or may not be overpriced at their new height. Every potential investment should be scrutinized on its current merits, not on the trajectory that got it to its present price.
As an old Wall Street saying goes, “The stock doesn’t know where it’s been.”
Disclosure: One of my clients owns shares in Maui Land & Pineapple.