Hit Hard This Year, These Four Stocks May Rebound

John Dorfman

June 24, 2019 (Maple Hill Syndicate) – On Wall Street, FOMO means fear of missing out.

I think what many investors are feeling now is not FOMO but FOHAMO – fear of having already missed out.

The stock market’s waterfall decline in February and March created some bargains, but with a virus-led recession starting, many investors were afraid to jump in and snatch them. Now, the market rally that began March 23 has brought many stocks back to where they were when the year began.

In my view, there are still some potential bargains left. Here are four stocks that I think offer an antidote to FAHAMO. Each of these stocks:

  • Has grown sales and earnings at an average of 10% a year or better in the five years through March.
  • Are down at least 15% in the past six months.
  • Sell for less than book value (corporate net worth).

Of course, the ability to grow in the past five years doesn’t guarantee smooth sailing in the next five. The challenges are different now. Nonetheless, consider these.

Citizens Financial

Banks already had a problem before the pandemic started. Interest rates were too low, and they still are. A bank makes more money by borrowing at 4% and lending at 8% than by borrowing at 1% and lending at 2%.

The pandemic adds a new problem – bad loans. Loans to hotels, movie theatres, cruise ships and many other industries are likely to turn sour. And the same is true for loans and credit-card debt issued to employees in those industries.

That’s why many bank stocks are cheap now. Among them, I would highlight Citizens Financial Group Inc. (CFG). It’s no financial powerhouse, but it has managed to grow revenue at 11% a year the past five years, and earnings considerably faster.

Established in 1828 in Providence, Rhode Island, Citizens was owned by Royal Bank of Scotland from 1988 through 2014. Now it is independent again, running a network of 1,200 bank branches in 11 states.

The stock sells for only 56% of book value, a fact that may have helped motivate three of the bank’s directors to buy shares in April and May.

Toll Brothers

A builder of high-end homes, Toll Brothers Inc. (TOL) has grown its revenue at a 21% pace in the past five years, and earnings at 22%. Growth has slowed lately, and now the question is whether people will have the courage to buy homes, especially high-end homes, during the coronavirus recession.

Analysts are evenly split on Toll. Of 22 brokerage firms covering it, 12 rate it a “buy,” and 10 are negative. I’m counting “hold” ratings as negative, since on Wall Street, “hold” is often a euphemism for “sell.”

Toll shares were at $48 at the peak in February, fell all the way to $14 at the March low, and now sell for about $32. My take is that the company will have a rough go for at least a year. However, I regard it as a good long-term holding.

Gray Television

For years, the story in advertising was that television was taking ad dollars away from newspapers. In more recent years, it’s the Internet that’s been taking ad dollars away from radio and TV stations.

To make matters worse, the current recession will probably cause companies to cut their ad spending, because advertising is a discretionary expense and corporate budgets will be strained.

Gray Television Inc. (GTN), based in Atlanta, owns 157 TV stations that are affiliated with ABC, CBS, Fox or NBC.

Gray’s shares are down 34% this year through June 19. They sell for only six times the past four quarters’ earnings, and 76% of book value. The company’s problems are real, but at this level (near $14, down from more than $22 in February) I think the odds favor the investor.

Brook 1 Automotive

On June 15, Steven Stanbrook, a director, bought 1,500 shares of Group 1 Automotive Inc. (GPI). That increased his stake to 4,412 shares, or about $280,000 at Friday’s price.

Stanbrook is a private equity investor and a veteran of many corporate boards, of both public companies and private ones. His purchase was notable because it was the first insider buy at Brook 1 since 2015.

The company, based in Houston, Texas, owns some 185 auto dealerships and franchises another 242. It also owns 49 collision centers. It operates in the U.S., United Kingdom and Brazil.

All three countries are heavily affected by the Covid-19 epidemic now. When a recovery will come is unknown. The stock sells for about seven times recent earnings and 10 times estimated earnings. Over the past ten years, a normal multiple for it has been 14.

Disclosure: One of my clients owns shares in Toll Brothers.

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.

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