Casualty List Brings Together Stocks That Are Undeserving Of Bad Rap
Posted: January 12, 2016
Sometimes bad things happen to good stocks.
In an effort to find bounce-back candidates, I compile a quarterly Casualty List of stocks that I think have been unduly punished by the marketplace.
The one you’re about to read is the 51st Casualty List. (I began this series in July 2000.) On average, these lists have gained a little more than 19 percent per year, compared with a little less than 9 percent for the Standard & Poor’s 500 Index. Those figures are total returns, including dividends, for the 47 columns on which one-year results can be calculated.
Thirty-four of those Casualty Lists have been profitable, and 27 of them have beaten the S&P 500.
The list from a year ago was scuttled by an 83 percent loss in coal producer Cloud Peak Energy Inc. With oil and gas increasingly cheap and with environmental regulations increasingly tight, no one wanted coal. Overall, my list from January 2015 lost close to 19 percent, while the S&P 500 was down less than 5 percent.
Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results.
For today’s column, there were plenty of casualties to choose from. The stocks I am recommending today were down at least 15 percent in the fourth quarter and at least 35 percent in the past six months.
Green Brick Partners
Green Brick Partners Inc. (GRBK) is a housing development company based in Plano, Texas. More than half of its stock is owned by hedge funds run by David Einhorn and Daniel Loeb. The company buys land, plans developments, markets homes and arranges financing but often subcontracts the building to other builders.
In the past six months, Green Brick stock has fallen like a ton of …well, you know. From more than $14 a share last summer, it has fallen to under $6.
David Einhorn has been going through a rough spell as a hedge-fund manager, but I believe he is intelligent and a penetrating student of business. Also, I am optimistic that homebuilding is on the comeback trail. For those reasons, I think Green Brick is attractive at its current valuation of four times earnings.
Polaris Industries
Polaris Industries Inc. (PII), with headquarters in Medina, Minn., makes snowmobiles, motorcycles and off-road vehicles. It has lowered its earnings guidance recently, and the stock has fallen out of bed, dropping from more than $150 in October 2014 to under $80 last week.
Yet Polaris is a company with a strong record of growth and a superb record of profitability. For example, its return on stockholders’ equity was above 30 percent in each of the past 15 years. In the past 10 years, it has grown its revenue at a 12.5 percent clip and earnings even faster.
I consider the recent drop in the stock an example of Wall Street getting excessively caught up in the game of whether a company beat expectations. I consider Polaris a good buy at the current valuation of 11 times earnings.
Spirit Airlines
An ultra-low-cost airline based in Miramar, Fla., Spirit Airlines Inc. (SAVE) serves 57 airports with a fleet of about 70 Airbus planes. The average age of its planes is less than six years, which gives it an edge in fuel efficiency over some competitors. It carries only a small trace of debt on its balance sheet.
Why, then, has the stock fallen from $84 in December 2014 to less than $39 now? The company has said that margins will be under pressure because lower jet fuel costs may enable its competitors (such as Southwest Airlines) to compete more effectively in Spirit’s low-priced niche.
This may be true, but Spirit has consistently shown it can handle tough price competition.
China Life
Lastly, I will shock some people by recommending a Chinese stock. Yes, China’s economy is slowing, but in my opinion, it is a normal business cycle, not a bubble in the process of bursting.
China Life Insurance Co. is traded in the U.S. as an American Depositary Receipt with the symbol LFC. The stock has fallen from around $26 in April to less than $13 now.
Yet last year, China Life reported earnings of $5.2 billion on revenue of $71.2 billion. I see no big slowdown in operating results.
Rather, the stock has been wounded because of a near-panic in the Chinese stock market.