Marathon Petroleum, Frontline on Casualty List
Posted: April 04, 2016
I like to find wounded stocks that I think have excellent recovery potential.
That’s the point of my Casualty List, published at the end of each quarter. The smacked-down equities I recommended in my first 48 Casualty Lists have returned an average of 18.4 percent in 12 months, compared to 8.8 percent for the Standard & Poor’s 500 Index.
But the success has by no means been consistent. Of those 48 lists, 34 have been profitable and 14 unprofitable. While 27 of my Casualty Lists have beaten the S&P 500, 21 have trailed the index, including the last seven in a row.
My Casualty List from a year ago was a flop. There was only one winner, Pilgrim’s Pride Corp. There were three losers, the worst of which was Micron Technology Inc. (MU), down 61.4 percent. I owned Micron for myself and for clients when that column was published and for several months afterward.
In all, my picks from a year ago sustained a 29.5 percent loss, badly trailing the S&P, which returned 1.8 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.
Try, try again
Why the recent cold spell? The market in the past couple of years has been a momentum market rather than a mean-reverting market. Also, traders have rewarded earnings growth (both real and imagined), while being unkind to value stocks.
As longtime readers know, I am a dyed-in-the-wool value man. I believe value will return to favor. In fact, I think the pendulum has started to turn back in that direction.
So with pride and hope, I bring you my 52nd Casualty List. (Lists 49-51 have already been published but weren’t included in the tabulation above because it’s too soon for 12-month results.)
Here are four new Casualty List picks. Each was down 20 percent or more in the first quarter of this year.
Marathon Petroleum
Refiners had a tough fourth quarter as gasoline supplies veered into surplus. Marathon Petroleum Corp. (MPC), one of the biggest refiners, fell nearly 30 percent.
Key products refiners produce are gasoline and home heating oil. I expect gasoline consumption to rise, based on reasonable gas prices and an improving economy. Home heating oil sales were depressed by an unusually mild winter, but I don’t think the odds favor a repeat.
In addition to its refining operations, Marathon, with headquarters in Findlay, Ohio, operates some 8,400 miles of oil and gas pipelines. It has more than 8,000 Speedway convenience stores (of which about 2,700 are company-owned). I see it as a solid company with staying power and a bargain at seven times recent earnings.
Concert Pharmaceuticals
A debt-free company whose stock was slammed last quarter is Concert Pharmaceuticals Inc. (CNCE) of Lexington, Mass. The company has several drugs in clinical trials. They are intended to treat cystic fibrosis, cancer, depression and certain symptoms of Alzheimer’s disease.
I see no chance that all of these will pan out, but if any one of them does, this small-cap stock (market value $306 million) could show substantial gains. The shares fell 27 percent last quarter as biotechnology firms in general lost favor with increasingly cautious investors.
Universal Insurance
Despite a good record in growing sales and earnings, Universal Insurance Holdings Inc. (UVE) saw its shares fall nearly 24 percent last quarter. The company, based in Fort Lauderdale, Fla., sells homeowners insurance and other property-and-casualty coverage.
It is strongest in its home state, but now has a presence in 15 states. It has increased its revenue at a 32 percent annual clip the past three years, and earnings even faster. Yet the stock sells for only six times earnings.
Frontline Ltd.
As a high-risk speculation, I like Frontline Ltd. (FRO), a Bermuda-based oil tanker company whose stock fell almost 44 percent last quarter.
This stock has been in a declining trend since mid-2008, dropping from well above $300 a share to $8.38 recently. Ship owners built too many ships when times were good, and a global oil glut has hurt the day rates for tankers.
However, there are signs in the past few weeks that shipping rates are perking up. Meanwhile, Frontline shares have reached a dirt-cheap valuation of three times recent earnings and 0.3 times book value (corporate net worth per share).
We’ll see whether these four new picks can get the Casualty List back on its historic track of success.