Trio of stocks still looks like good buys
Posted: May 26, 2015
Many people get antsy when a stock has doubled from the purchase price.
That’s understandable, but a stock that has doubled shouldn’t be automatically be sold, or even trimmed.
The decision should depend on three things:
- Your evaluation of the stock’s prospects looking forward — nevermind the past.
- The stock’s valuation compared with earnings, revenue and book value (company net worth per share).
- The percentage of your portfolio the stock represents.
In client portfolios, I almost always trim stocks if they reach 10 percent of the account’s value. But whether it’s a demure trim or an outright sale depends on how expensive the stock has become, and how its business is going.
THIS SERIES
To illustrate these points, I’ve written seven columns, beginning in 2001, about stocks that have doubled within 12 months that I think are good buys. The column you’re reading is the eighth one.
Of the seven columns on this subject, five have beaten the Standard & Poor’s 500 Index, and six have been profitable.
The average gain on my “Doubled and Still Cheap” selections has been 17.5 percent, compared with 12.1 percent for the S&P 500 during the various one-year periods. All figures are total returns including dividends.
In my last column on this subject, on May 27, 2014, I recommended three stocks: Delta Air Lines Inc. (DAL), Pilgrim’s Pride Corp. (PPC) and YPF Sociedad Anomima (YPF). As a group, they rose 19 percent, compared with 13.5 percent for the S&P 500.
Pilgrim’s Pride, a poultry producer, was the best gainer, up 48 percent through Friday. I still like this stock and own it for one or two clients.
Delta returned 10 percent. I like it as well and own it personally and for almost all of my clients.
YPF, an oil company from Argentina, was the sole loser, down about 2 percent. I no longer recommend it since the global drop in oil prices has changed the climate for energy stocks.
The performance of my column recommendations is hypothetical and doesn’t reflect taxes or trading costs. Past performance doesn’t predict future results, and the performance of my column picks shouldn’t be confused with that of actual portfolios I manage for clients.
JETBLUE
Here are three stocks that have soared in the past year yet still look to me like good buys.
The first is JetBlue Airways Corp. (JBLU). In the 52 weeks through Friday, it gained 124 percent.
For most clients, I own Delta and Alaska Air Group (ALK), whose gains during the past year have been respectable but not as spectacular as JetBlue’s. Indeed, I own JetBlue for just one client.
I like Delta primarily because it’s the cheapest stock in the airline group, and Alaska Air primarily for its route structure. JetBlue is appealing because it has been gaining market share and seems to compete well on price and service.
JetBlue shares trade at 13 times recent earnings, and about 10 times the earnings analysts anticipate for 2016. Those are attractive multiples.
MGP INGREDIENTS
MGP Ingredients Inc. (MGPI), an alcohol distiller headquartered in Atchison, Kan., was founded in 1941 and has been publicly traded since 1988. But as far as I can tell, not a single Wall Street analyst publishes opinions or earnings estimates on it.
Academic research indicates that unfollowed stocks often do well, and MGP certainly did well in the past year, rising 198 percent. I think further gains might lie ahead, since the stock trades at just 14 times recent earnings and 1.0 times revenue.
I also like MGP’s balance sheet, which shows debt less than 10 percent of stockholders’ equity.
NEWLINK GENETICS
Even better from a balance sheet perspective is NewLink Genetics Corp. (NLNK) of Ames, Iowa. Its debt is less than 1 percent of equity.
NewLink, a biotech firm, is working on a drug for pancreatic cancer, dubbed HyperAcute. The company’s stock fell 23 percent in a day this month on news that the drug’s Phase III clinical tests will take longer than expected. Nevertheless, the shares still are up 111 percent from a year ago.
In addition to pancreatic cancer, NewLink is working on drugs to treat a half-dozen other forms of cancer. Success in clinical trials is excruciatingly hard to predict, but three of five analysts who follow the stock rate it a buy, and big drug companies are evincing interest in NewLink’s research.
Even though NewLink had revenue of $172 million last year, it should still be considered a fledgling company with an unproven product. But as a speculation, I think it’s interesting.