3 stagnant stocks shouldn’t be ‘Do Nothings’ for long
Posted: May 12, 2015
Why doesn’t anyone love a stagnant stock?
Tons of people like to jump onto the bandwagon of stocks that have been rising. And some people (like me) like to snatch up stocks that have fallen. But very few people choose to look at stocks that haven’t done much lately, either way.
That’s why, on a lazy spring afternoon in 1999, I conceived of the Do Nothing Club. It contains stocks that have basically gone nowhere for the past year but that I figure might do something (and fairly soon).
In the Do Nothing spirit, this column should ideally be read in your hammock, while sipping on a mint julep. However, you may read it at your desk or on the train, if you wish.
Here are three sleepy stocks that I think are likely to come alive soon. At the end of this column, I’ll detail the track record of past recommendations.
PHILLIPS 66
It’s no secret that I like refining stocks these days. Are they energy stocks? Sure, in a sense. But for a refiner, oil is a raw material to make gasoline, heating oil and jet fuel. When oil gets cheaper, as it has lately, a refiner’s profit margins are not necessarily hurt. They may even expand.
At Phillips 66 (PSX), a big refiner based in Houston, cash flow is robust and book value (corporate net worth per share) is near record levels. Yet the stock is going nowhere, amid the energy malaise.
I think the malaise will last at least a few more months, but at about 10 times earnings and 0.3 times revenue, I think Phillips 66 is a good value.
SCHWEITZER-MAUDUIT
A mid-sized Do Nothing stock I like is Schweitzer-Mauduit International Inc. (SWM). Headquartered in Alpharetta, Ga., the company has an unusual blend of businesses. It manufactures cigarette paper and other specialty papers such as battery wrappers and wrappers for straws.
It sells reconstituted tobacco leaf and a wide variety of filters such as fuel filters, air filters and reverse osmosis water filters.
Tobacco-related business still accounts for 75 percent of Schweitzer-Maudit’s revenue, but it has taken its first major step away from tobacco with the 2013 acquisition of DelStar, which put the company on the map in the filter business, which has higher growth than tobacco does.
The stock sells for 14 times recent earnings and 11 times estimated 2016 earnings.
TRIUMPH GROUP
Triumph Group (TGI), of Berwyn in Chester County, is involved in many aspects of aircraft parts manufacture. For example, it makes wings, fuselage skins, insulation systems and exhaust nozzles, to name just a few examples.
The aerospace industry has been in a revival, and Triumph has missed the party, to a substantial degree. However, it is an established firm with good connections, and I think it can mount a comeback.
Furthermore, the stock is priced alluringly at 11 times estimated earnings for the fiscal year in progress.
PAST RESULTS
This is the 12th column I’ve written about the Do Nothing Club. Three-year returns can be calculated for nine previous columns, and they have averaged 36.9 percent, compared with 12.7 percent for the Standard & Poor’s 500 Index over the same nine periods of three years each.
One-year returns can be calculated for 11 columns, and they have averaged 10.8 percent, versus 6.4 percent for the index.
My Do Nothing selections have beaten the S&P 500 seven times out of 11 on a one-year basis, and five times out of nine on a three-year basis.
My picks from a year ago did poorly. Navigators Group Inc. returned 29.4 percent, but Agco Corp. dropped 6.7 percent and Chevron Corp. was down 10.5 percent. On average, that comes to a gain of 4.1 percent. For comparison, the S&P 500 showed a return of 13.76 percent including dividends.
My picks from three years ago have done well. Nasdaq OMX Group Inc. (NDAQ) showed a 124.4 percent return. LifePoint Hospitals Inc. (LPNT) chipped in 102.4 percent, and Seaboard Corp. followed with 90 percent. All three beat the S&P 500, which was up 69.4 percent.
Keep in mind that past performance doesn’t predict the future. The results of my column recommendations are theoretical and don’t reflect trading costs or taxes. And the record of my column picks shouldn’t be confused with results I obtain for clients.
I do think the record is suggestive, though, of one conclusion. The fact that a stock hasn’t moved much in a year or so should not be a de facto disqualification. Some of these sleepy stocks deserve a wake-up kiss.