Ericsson and Myriad Genetics May Be Ripe for a Rebound
Posted: November 15, 2016
Yogi Berra, the great baseball catcher and font of aphorisms, once spoke about a restaurant that was “so crowded, no one goes there anymore.”
A similar thing happens in the stock market. When someone devises a way to make money, others try to copy it. If the technique becomes popular enough, its effectiveness is vitiated.
Suppose someone discovers that companies run by left-handed chief executives have superior returns. Soon the price of such companies will be bid up to the point that there is no advantage in buying them.
The technique I’m discussing today has partially suffered that fate, but it still has some juice left in it. That technique is buying stocks that have been battered by tax selling.
Every year in the fourth quarter, many investors sell their losers in order to deduct the losses on that year’s tax return. The tax-motivated selling pushes the price of some stocks below their fair value.
Swooping in to buy the stocks that have been kicked when they’re down is a time-honored technique. It used to be something one did in January, but these days bargain hunters often start looking in December.
The Record
I’ve written 13 columns recommending stocks that have been roughed up by tax selling. The average 12-month return on my recommendations has been 9.7 percent, compared to 7.6 percent for the Standard & Poor’s 500 Index.
Eight of the 13 columns have been profitable and seven have beaten the S&P 500 on a 12-month basis.
Last year’s crop was a good one. Cummins Inc. (CMI) returned 45 percent. Deckers Outdoor Corp. (DECK) was up 30 percent and Pulte Group Inc. (PHM) 1.5 percent. Western Digital Corp. trailed, down 2 percent. In all, my picks returned 18.6 percent from Nov. 17, 2015, through Nov. 11, 2016, versus 7.8 percent for the index.
Bear in mind that the performance of my column recommendations is theoretical and doesn’t reflect actual trades, trading costs or taxes. Past performance doesn’t predict future results. And the returns on my column recommendations shouldn’t be confused with those I earn on actual portfolios I manage for clients.
Ericsson
The first January rebound candidate I recommend this year is Ericsson Telephone Co. (ERIC), a Swedish manufacturer of phones and networking equipment.
Competing with Apple Inc. (AAPL) is no picnic, and Ericsson has struggled: Revenue and earnings have been flattish for the past decade. But at least Ericsson hasn’t suffered the fate of BlackBerry Ltd. (BBRY), an early leader in smartphones, which was flattened.
Ericsson shares fell from near $10 at the start of this year to just over $5 now. Even after taking dividends into account, it is down 46 percent through Nov. 11.
Ericsson sells for just 0.7 times revenue and 1.1 times book value (corporate net worth per share). It has recently struck up an alliance with Cisco Systems Inc. (CSCO). I think the stock is intriguing at this level.
First Solar
Down 51 percent is First Solar Inc. (FSLR), a leading manufacturer and installer of solar energy equipment. The company has turned a profit in eight of the past 10 years.
Unfortunately, the solar industry counts on subsidies from the state and federal governments. State budgets these days are pinched, and President-elect Trump may be less friendly to the industry than President Obama was.
Still, as I drive around the Boston area where I live, I see increasing numbers of solar installations. I think the solar industry is starting to acquire some momentum and popularity.
First Solar stock sells for 0.6 times book value and seven times recent earnings. I think the stock is a reasonable buy here.
Myriad Genetics
Rarely do I get to buy biotechnology stocks. They radiate promise and appeal to growth investors; therefore, they don’t often fall into the orbit of a value investor like me.
One biotech issue that I have my eye on, though, is Myriad Genetics Inc. (MYGN). A leader in genetic testing, it has increased its revenue from $402 million five years ago to about $750 million in its latest fiscal year.
Despite its past growth and the promising field in which it operates, Myriad Genetics saw its stock fall almost 60 percent this year, partly on concerns that insurance companies and government agencies are becoming more reluctant to pay for costly testing.
Without a doubt, the company’s growth has slowed. Nonetheless, I find the shares appealing at 13 times recent earnings.
Disclosure: My colleague Tom Macpherson owns Myriad Genetics for one or more of his clients. With that exception, my firm doesn’t own the stocks discussed in today’s column, nor do I own them personally.