Month: January 2019
Micron and Systemax are on the Casualty List
Posted: January 23, 2019
By John Dorfman
January 21, 2019 (Maple Hill Syndicate) – A harsh December capped a hard fourth quarter for stocks. Many good companies have been knocked down, some to bargain levels.
I’ve picked four of them for my Casualty List, a quarterly compilation of wounded stocks that I believe may recover strongly.
The Casualty List has a profitable track record. This is the 63rd one. One-year returns can be calculated for 59 of them, and have averaged 19.01%. That compares to an average of 9.91% for the Standard & Poor’s 500 Index over the same 59 periods. Figures are total returns including dividends.
My picks are far from infallible. They have been profitable 41 times out of 59, and have beaten the S&P 500 33 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.
If the goal is to buy low and sell high, it’s logical to look at stocks that have been whacked. Here are four new ones.
Micron
Timing is vital with Micron Technology Inc. (MU), which has a history of huge moves. It was up 300% in 2009, and 243% in 2013. But it fell 68% in 2002 and 64% in 2008.
Right now, investors loathe the memory-chip maker, fearing that chip makers are entering a down cycle. The stock – down 30% last quarter — sits at about $36, compared to about $57 last May.
I believe investors are overreacting. Profits were near $12 a share last year and are expected to drop below $7 in 2020. Suppose it’s even worse than analysts project, and earnings fall to $5 a share. The current stock price is only seven times that figure. Looks like a bargain to me.
Systemax
The public knows Systemax Inc. (SYX) mainly as a retailer of personal computers, computer accessories and mobile phone gear. It sells by catalogue, the Internet, and retail stores. The majority of its revenue, however, comes from selling industrial equipment, including materials-handling machines.
Not well known, and on the small side (with a market value of $900 million), Systemax stands out because it is debt free, had an astounding 80% return on stockholders’ equity in 2017, and sells for a mere seven times earnings.
Down 27% last quarter, Systemax is barely followed on Wall Street. Only two analysts follow it; both call it a “buy.”
Live Oak
Down 44% last quarter was Live Oak Bancshares Inc. (LOB), based in Wilmington, North Carolina. It specializes in lending to small businesses such as veterinarians, pharmacies and funeral homes.
This bank looks good on net interest margin (the spread between the rate it pays on deposits and the rate it gets on loans). Its return on assets is also high. Those are two of my favorite measures in evaluating bank stocks.
Like Systemax, Live Oak is little covered by Wall Street or the Financial Press. It has been publicly traded only since July 2015. The current stock price, near $16, is a dollar below the initial offering price.
McDermott
An astounding 64% drop in the fourth quarter left shares in McDermott International Inc. (MDR) at less than $7, down from $22 at the end of 2015. It has since bounced back to about $9.
This engineering and construction firm gets a large chunk of its revenue from Saudi Arabia. As many people believe that the crown prince of Saudi Arabia was complicit in the murder of a U.S.-based journalist, investors are highly concerned.
Even before that problem erupted, investors were unenthusiastic. Profits are puny of late, and earnings were negative in 2013-2015.
Yet, the stock price seems to fully incorporate all the bad news. Shares go for 0.23 times revenue and 0.45 times book value (corporate net worth per share). I think it is so cheap that it can rise even if Saudi business drops a lot.
Last Year
I mentioned earlier that my Casualty List picks aren’t infallible. In the past 12 months, they did badly.
All four of my picks fell more than the S&P 500, which declined 3.91% from January 16, 2018 through January 16, 2019.
Argan Inc. (AGX), Gilead Sciences Inc. (GILD) and CVS Health Inc. (CVS) were down 10% to 17%. The big loser was Owens & Minor Inc., down 63%. The four picks combined lost 26%.
Disclosure: I own Argan and Gilead for one client and CVS Health for a couple of clients. I don’t personally own any of the stocks discussed in today’s column.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.
Analysts Most Loved and Most Hated Stocks Both Rose in 2018
Posted: January 18, 2019
By John Dorfman
January 14, 2019 (Maple Hill Syndicate) – The stocks analysts most adored at the start of 2018 beat the overall market last year. But the stocks they most despised did too.
The analysts’ darlings posted a total return of 11.5% last year, while the overall market (as measured by the Standard & Poor’s 500 Index) fell 4.2%.
The favorites enjoyed a 55% gain in Evolent Health Inc. (EVH) from January 9, 2018 through January 9, 2019. Viper Energy Partners LP (VNOM) also scored a handsome gain, up 37%
Two of the analysts’ pet stocks fizzled, however. Antero Midstream Partners LP (AM) dropped 16% and Sage Therapeutics Inc. (SAGE) fell 30%.
There are other reasons the analysts might not want to break out the champagne. The stocks they most despised as 2018 began beat the market, returning 7.5%. (All figures are total returns including dividends.) And the long-term results aren’t terribly favorable to Wall Street’s finest.
Each year, in early January, I identify the stocks most unanimously acclaimed by Wall Street analysts, and those with the highest proportion of “sell” recommendations. At the end of each year, I tabulate the results.
Not Supermen
In 20 outings from 1998 through 2018 (with a one-year timeout in 2008, when I had temporarily retired as a columnist), the analysts’ most-loved stocks have beaten the S&P 500 only seven times.
The Wall Street darlings have beaten the most-hated stocks 11 times and lost to them 8 times. One year was a tie.
Meanwhile, the stocks held in the lowest regard by the analytical corps have managed to beat the market half the time.
Over the years, the average return has been 8.9% for the adored stocks and 7.6% for the despised ones. Both figures trail behind the average gain for the S&P 500, which has been 11.0%.
Clearly, the analysts are not Supermen (or Superwomen either) when it comes to stock picking.
Adored
This year, oddly considering that oil prices have been under pressure, two of the stocks analysts most unanimously revere today are energy stocks.
Marathon Petroleum Corp. (MPC) garners 19 “buy” recommendations from Wall Street, with no “hold” or “sell” recommendations. It’s an oil refiner, based in Findley, Ohio. While it’s refreshing to see such unanimity for a non-technology stock, one might question be “who’s left to buy?”
Viper Energy Partners LP (VNOM), which was the second-most-popular stock a year ago, occupies the very same spot this year, with 16 “buys” and no dissenting voices.
Camping World Holdings Inc. (CWH) comes in third, with 12 analyst fans and no detractors. I feel that analysts pay too little attention to companies’ balance sheets and too much attention to earnings. Camping world has debt equivalent to 33 times stockholders’ equity.
There were four stocks with 11 “buy” ratings and no dissents. Following my custom, I chose the largest one to include here. It is Abiomed Inc. (ABMD) of Danvers, Massachusetts, which makes “technologies to assist and replace the pumping function of the heart.”
That sounds exciting, but the stock is very high priced – 88 times recent earnings, 18 times book value, and 21 times revenue.
Despised
What about the stocks analysts hate?
For the second year in a row, World Acceptance Corp. (WRLD) is the most scorned stock (among all those with a market value of $500 million or more and coverage by at least four analysts). It gets one “hold” rating and three “sells.”
In the past 12 months World Acceptance rose 35% even though analysts hated it. The company makes small consumer loans to people with bad credit. One concern is stricter regulation of such lenders, but that seems unlikely under the Trump administration.
American States Water Co. (AWR) is second among the spurned. It gets two “holds” and three “sells.” I agree with the analysts that this stock is unattractive. It shows no growth the past three years, yet sells for rather high multiples.
Next, with seven “holds” and seven “sells,” comes Franklin Resources Inc. (BEN), which for many years has been a widely respected mutual-fund company. Analysts must figure that the trend to passive index-fund investing is a death knell.
Rounding out the despised list is Tanger Factory Outlet Center (SKT). It’s a real estate trust that operates outlet malls. The dividend, currently yielding 6.4%, may need to be cut.
It’s always hard to predict which will do better, the adored stocks or the despised. If you forced me to bet, I would put my money on the despised stocks this year.
Disclosure: I don’t currently have positions in any stocks discussed in today’s column, for myself or for clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.
Hostile Climate Makes My Robot Portfolio Keel Over
Posted: January 10, 2019
January 7, 2019 (Maple Hill Syndicate) – Last year was a lousy one for value investors. For my Robot Portfolio, designed as an extreme exemplar of value investing, it was a terrible year.
The Robot Portfolio declined 19.5% last year, while the overall market, as measured by the Standard & Poor’s 500, fell 4.7%. Seven of the portfolio’s ten stocks lost ground, with the biggest loser, SandRidge Energy Inc. (SD) falling 64%. Figures are total returns, including dividends.
The Robot usually fares better. I’ve been tracking it for exactly 20 years, and it boasts a cumulative return of 1,278%, which is a compound annual return of 13.6%. By contrast, the return on the S&P 500 from 1999 through 2018 is only 290% or 5.5% per year.
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.
What is this Robot Portfolio? It’s a naïve stock-picking paradigm. It starts with all U.S. stocks with a market value of $500 million or more and debt less than stockholders’ equity. It then blindly, robotically, picks the ten cheapest.
My measure of cheapness is the price/earnings ratio, which is a stock’s price divided by per-share earnings for the past four quarters. Stocks with low ratios are, by definition, unpopular.
The theory behind the Robot Portfolio is simple. Stocks advance by exceeding expectations, and low expectations are easier to exceed.
Value Eclipse
For most of the past 80 years, the value style of investing – in essence, bargain hunting — has usually done better than growth investing, which favors stocks with fast-growing earnings.
In the past ten years, though, growth has slaughtered value. The Russell 3000 growth index has returned almost 310%, compared to about 187% for the Russell 3000 value index.
Last year growth stocks were down 2.1%, value stocks down 8.6%. No wonder the Robot Portfolio had a miserable year.
New Picks
Is the eclipse of value permanent? I don’t believe so. Success in business is more cyclical than linear. The most successful companies attract imitators and competitors. The least successful may develop new products, get better leadership, or be acquired.
Here, then, are the ten stocks my Robot picks for 2019.
Micron Technology Inc. (MU), a maker of memory chips, is the cheapest stock in my universe, selling for 2.7 times recent earnings. Traders expect earnings to fall this year and next, because the semiconductor industry is feast-or-famine, and appears to be heading into a down cycle.
Mallinckrodt Plc (MNK) is a drug company whose product line includes opioids. Traders fear that the company will face lawsuits or harsh regulation because it may have encouraged or failed to combat the overuse of such drugs. So, it sells for just under three times earnings.
At 3.5 times earnings is Gulfport Energy Corp. (GPOR), an oil and gas producer active in the Gulf of Mexico. With oil prices plunging, and offshore drilling expensive, investors are skittish.
Nearly Friendless
CVR Refining LP (CVRR) weighs in at 3.7 times earnings. Analysts think its revenue will decline this year and next. Of eight analysts who follow it, only one recommends it.
A leading maker of computer disk drives, Western Digital Corp. (WDC), sells for 3.7 times earnings. The rise of mobile devices, at the expense of personal computers, has put some strain on the company.
For four times earnings, you can pluck up shares of Schnitzer Steel (SCHN), which collects scrap steel, recycles it, and also operates auto junk yards. Analysts foresee falling profits this year and next.
Another casualty of the weakness in oil prices since mid-2014 is Laredo Petroleum Inc. (LPI). Only five out of 17 analysts recommend it, but it looks attractive to me at four times earnings.
Mammoth Tusk
A third energy stock on the Robot’s list is Mammoth Energy Services Inc. (with the engaging symbol TUSK), which provides services to land drillers. It sells for four times earnings, perhaps because investors doubt the fracking boom will last.
At 4.5 times earnings we have Bed Bath & Beyond Inc. (BBBY), a retailer of housewares. Revenues have flattened out at about $12 billion and profits are falling.
Rounding out the list, and still under five times earnings, we have American Equity Investment Life Holdings Co. (AEL). The Des Moines, Iowa, company sells life insurance and annuity products. Analysts expect earnings to taper off in 2019 and 2020.
These companies have obvious problems, or the stocks wouldn’t be cheap. If you decide to buy one, don’t wait for the problems to be resolved. That would vitiate the opportunity.
Disclosure: I own shares of Schnitzer Steel for one client.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.