Casualty List Looks Ripe For Recovery
Posted: October 03, 2018
Many investors won’t buy a stock unless it shows “relative strength,” in other words, has been rising more than its peers lately.
They are missing some great buying opportunities.
Sometimes, I believe, the best time to buy a stock is when it is down. That’s why each quarter I compile a “Casualty List” of stocks that have been wounded and that I think have excellent recovery potential.
This is the 62nd Casualty List I’ve prepared, beginning in 2000. The average 12-month gain on the past lists (which can be calculated for 58 columns) has been 18.5%. That compares with 10.2% for the Standard & Poor’s 500 Index.
Of 58 attempts, 41 have been profitable and 33 have beaten the S&P 500.
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.
My picks from a year ago were themselves a casualty. I had a big loss in Tahoe Resources Inc. (TAHO) and a loss in Cirrus Logic Inc. (CRUS). These drowned out gains in Cheesecake Factory Inc. (CAKE) and Interpublic Group of Cos. Inc. (IPG). Overall, my picks fell 8.4%, while the S&P returned 17.2%.
If you’re not afraid of trying to “catch a falling knife,” as the saying goes, here are four stocks that have been pummeled and that I think will bounce back.
The giant of semiconductor stocks, Intel Corp. (INTC) suffered along with the entire semiconductor industry in the third quarter. Investors seem to swing between love and hate for the semis more than with almost any other industry.
At the moment, hate has a home there, because orders appear to be slowing down. Investors are also fretting about capacity constraints at Intel that caused production of central processing units (CPUs) to be lower than planned.
I love to buy on bad news that is real but temporary, and that’s exactly what I think we have here. Intel raises its dividend every year like clockwork — by 10% in 2018 and probably by a similar percentage in 2019. It dominates a vital industry and has been profitable at least 15 years in a row.
Intel was at $55 in mid-June and sells for about $47 now, a drop of about 14% in a rising market.
Long ago the largest corporation in America, U.S. Steel Corp. (X) is now a mid-cap stock and not a particularly large one at that, with a market value of $5.4 billion. (I define mid-cap as $1 billion to $10 billion.)
It was clipped for a 12% loss last quarter, a little surprising considering that the steel industry is enjoying tariff protection from foreign imports, courtesy of the Trump administration.
After posting losses in 2015 and 2016, U.S. Steel made a profit in 2017 and appears headed for a good profit this year, about $5.79 a share if analysts’ guesses prove true. With the stock at about $30, it is selling for about five times estimated 2018 earnings.
In my back yard, Boston, lives State Street Corp. (STT), which provides custodial and investment services to mutual funds, endowments, and pension plans. The stock never excited me in the past, but looks pretty good to me after two quarterly declines have reduced the price to about $84 from near $100.
The stock sells for 12 times earnings in a market where the average multiple is 21. It offers a dividend yield of 2.2% which appears secure. I think it’s a good long-term holding for conservative investors, and perhaps a good short-term play for traders.
As a high-risk speculation, I like Vipshop Holdings (VIPS), a Chinese company that conducts “flash sales” of branded goods over the internet.
The company has enjoyed rapid growth in sales, from about $23 billion in 2014 to an estimated $87 billion this year. Its revenue for the third quarter fell short of analysts’ expectations.
But in my opinion the company’s troubles weren’t bad enough to justify the huge drop in the stock price, from near $12 when the year began to $6.24 as of September 28.
All Chinese stocks are suffering from the trade friction between the U.S. and China, with tariff barriers going up on both sides. But crises often follow a pattern. The “crisis” evolves into a “problem,” and the problem is resolved, imperfectly, over time. That’s what I think will happen here.
Disclosure: I own Intel for a couple of clients and Interpublic Group for one client.