The Last Shall Be First – Or Shall They?
Posted: December 24, 2018
“The last shall be first,” it says in the book of Matthew.
How often does that happen in the stock market? According to a little study I performed, it happens about 44% of the time.
I studied the five worst-performing stocks in the Standard & Poor’s 500 each year, based on price change alone, and measured the total return (including dividends) the following year. This mini-study covered the worst losers of 2013-2017, and tracked results in 2014-2018 (this year’s results are through December 21).
Eleven of the 25 disgraced stocks in the study returned to grace in the following year, beating the market index.
The average total return for the scarlet-letter stocks was 8.7%, versus 8.1% for the market as a whole.
These results are close to a coin flip. So, is there any reason to focus on the year’s biggest losers? Yes, there is.
The big losers are often extreme performers the next year, for better or worse.
Perhaps you owned Vertex Pharmaceuticals (VRTX) in 2017, when it climbed 103%. Or maybe you were fortunate enough to enjoy a 95% gain in Freeport-McMoRan (FCX) in 2016. In 2014 you might have bagged a 94% gain in Edwards Lifesciences (EW).
Each of those stocks was among the biggest losers the year before.
You want to hear about the flip side? General Electric (GE) fell 45% in 2017 and is down another 58% this year. Under Armour (UA) dropped 39% in 2016 and 50% in 2017. Twitter Inc. had back-to-back losses of 44% and 35% in 2014 and 2015.
What this adds up to is this: It pays to scrutinize the list of big losers, but it’s a high-risk endeavor.
Let’s have a look at the five worst performers in 2018 as the year draws near a close.
Coty (COTY), of New York City, sells about $9 billion of cosmetics a year. It lost money in fiscal 2017 and 2018. Debt is more than $7 billion and has been climbing. The stock has fallen 68% this year.
In November, Camillo Pane stepped down as the company’s CEO and Pierre Laubies, formerly with Mars and Jacobs Douwe Egberts (a coffee maker) stepped in. Laubies almost immediately bought just more then $20 million in Coty stock.
Should you follow his example? I would wait for more signs of a turnaround.
For a long time, I thought that General Electric (down 59% this year) was like a tangerine, easily divisible into slices with a value greater than the whole. Alas, now it appears the company is so colossally mismanaged that it can’t get a grip on its problems.
A carpet and rug manufacturer, Mohawk Industries (MHK) is based in Calhoun, Georgia. In addition to carpet, it makes tile, wood and other flooring. Sales have grown steadily, to about $10 billion, but profits peaked in 2017.
The stock is down 59% this year, as investors reason that higher mortgage rates mean fewer housing starts, which in turn means less flooring. The damage seems excessive to me. I like Mohawk at the present price of about $113 a share, and would buy it up to $120.
Less than three years ago, a share of L Brands (LB) commanded $95 a share. Today it’s about $25.
Mall-based stores are the heart of L Brands, including Victoria’s Secret, Bath & Body Works and La Senza.
While L Brands’ stock has shrunk, revenue has grown. As a result, the stock price is now only 0.5 times revenue, versus about 2.5 times revenue three years ago. Maybe it wasn’t a good value at the peak price, but now I find it attractive.
Based in Dublin, Ireland, Perrigo Co. Plc (PRGO) makes generic drugs, baby formula, and hundreds of food and drug ingredients. The stock is down almost 58% this year. Sales and earnings are in their third consecutive year of decline. Profits are puny.
The stock sells for less than book value (corporate net worth per share) now. So, I think it is more likely to rise in 2019 than fall. But I’m lukewarm.
In Decembers past (2012-2017), I’ve written six columns touching on the year’s biggest losers. (In the past, I covered the biggest winners in the same columns.) In those six years, I recommended only 13 stocks among the losers.
The average 12-month total return on the losers I’ve recommended has been 42.3%. (As I said, these are extreme stocks.) That compares with 13.2% for the Standard & Poor’s 500 index over the same periods.
My losers beat the S&P only three years out of six, but by a wide margin when they did.
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.
Disclosure: Some accounts managed by a colleague at my firm own Edwards Lifesciences.
John Dorfman is chairman of Dorfman Value Investments LLC and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.