Thor Industries and Lam Research are on the Casualty List
Posted: July 03, 2018
July 2, 2018 — I love buying stocks when they’re down.
That’s the point of my quarterly Casualty List. At the start of each new quarter, I call to your attention some stocks that have been roughed up in the previous quarter, and that I think have excellent bounce-back potential.
Of my various series of articles, this has been one of the more successful. The average 12-month return has been 19.0 percent, well ahead of the Standard & Poor’s 500 Index, which averaged 10.1 percent for the same periods.
That’s based on 57 columns for which 12-month results can be measured. (Today’s is the 61st in the series.) Of those 57 columns, 41 were profitable and 33 beat the S&P 500.
My picks from a year ago performed well. Spearheaded by a 133 percent gain in Urban Outfitters Inc. (URBN), they rose 34.5 percent against 14.1 percent for the index. My worst loser was Cooper Tire & Rubber Co. (CTB), down 27 percent.
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.
The imposition of tariffs on imported steel and aluminum bodes ill for Thor Industries Inc. (THO), the largest U.S. manufacturer of recreational vehicles. An RV uses a lot of steel and aluminum.
In addition, Thor’s dealer inventories are up and its backlog is down in the past few months. The company issued a detailed and (to me) convincing explanation of these facts, but investors would of course prefer it the other way around.
And just to make matters worse, gasoline prices have been rising. RVs have been known to chug a gallon or two.
As a result, Thor shares have dropped to about $97 from over $150 late last year. At today’s price, I think the shares will be rewarding for patient investors. The current price is 11 times earnings, compared to Thor’s long-term average multiple of 16.
Thor has stayed profitable consistently, even through the great recession. It has earned a return on stockholders’ equity of 20 percent or better six times in the past 15 years, including last year and three of the past four quarters.
Based in Fremont, Calif., Lam Research Inc. (LRCX) is a leader in “etch,” creating the tiny grooves in computer chips into which circuitry fits. I have owned it a couple of times in the past, both for clients and personally. After the stock dropped 15 percent in the second quarter, it’s in my buying range again.
I haven’t decided whether to pull the trigger, because we already have quite a few technology holdings at my firm. If your portfolio isn’t technology-heavy, though, I think Lam deserves a look.
Lam broke through the $10 billion mark on revenue last year, earning an 18 percent net profit margin on that revenue. Its earnings have been positive in nine of the past 10 years and have grown in the past four.
As a personal choice, I will not own a tobacco stock. (My mother, a smoker, died of lung cancer.) However, I occasionally see tobacco stocks that I think are good investments.
That probably describes British American Tobacco (BTI) now. Through its acquisition of R.J. Reynolds in the United States, British American has obtained massive scale worldwide. The stock offers a dividend yield exceeding 5 percent and sells for less than three times earnings.
The company’s debt is high but tolerable. The threat of additional litigation seems to be receding. The trend for people to smoke less, in most countries, is real, but is partly compensated for by the company’s position in vape products.
It’s too early to tell how the legalization of marijuana in many localities will affect tobacco companies, but I suspect they will end up with significant market share.
DAQO NEW ENERGY
Daqo New Energy Corp. (DQ), based in Wanzhou, China, is one of the world’s largest makers of polysilicon, used to make solar panels and semiconductor wafers.
From about $21 a year ago, Daqo had climbed to more than $70 this May. In June it fell all the way back to $36 as the Chinese government moved to slow down the growth of the solar-panel industry in the face of overcapacity.
I would never say that any Chinese stock isn’t risky: The rules in a command economy are different from those in a free-market economy. Accounting standards are looser in China, and frauds are probably more prevalent than in the United States.
Nonetheless, China is the world’s second-biggest economy and one of the fastest-growing. Plus, stocks in China sell for far lower multiples of earnings than in the United States. Daqo, for example, sells for four times recent earnings, six times estimated 2019 earnings.
Disclosure: I own Daqo Energy for a few of my clients with high risk tolerance.
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 email@example.com.