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John Dorfman
John Dorfman
Articles (188)  | Author's Website |

Biogen and Southwest Are on the Casualty List

In a climate of rampant uncertainty, what should an investor do?

Texas opened its bars and then closed them again. Apple Inc. (NASDAQ:AAPL) opened its stores and then re-shut 32 of them. Walt Disney Co. (NYSE:DIS) has postponed the reopening of its theme parks. These just some of the hundreds of ripple effects from the pandemic.

In a climate of rampant uncertainty, what should an investor do?

My answer: You should do what you should do in normal times – buy the stocks of good companies when they are laid low by bad new that’s real but probably temporary.

One place to find candidates is on my Casualty List, a quarterly list I compile of stocks that have fallen in the most recent quarter, but that I think can recover and even thrive.

The Casualty List you’re about to see is the 69th one I’ve compiled. The average one-year gain on the first 65 of them has ben 15.5%. That compares well with the 9.2% average for the Standard & Poor’s 500 Index over the same periods. (Figures are total returns including dividends.)

Of the 65 Casualty Lists, 42 have been profitable and 33 have beaten the S&P 500.

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.

Biogen

I’ll start my latest Casualty List with Biogen Inc. (NASDAQ:BIIB). It sells for about $259 a share, down from well over $300 in April.

The stock took a tumble in April after failure in clinical trials for a proposed Alzheimer’s drug. Investors had pinned high hopes on that. But for perspective, nobody has come up with a good Alzheimer’s drug yet.

With a product line consisting of a dozen drugs, Biogen gets 80% of its revenue for six drugs that treat multiple sclerosis. Two key drugs in that group have patents that expire soon. The rest of revenue comes from drugs for leukemia and hemophilia.

I consider a return on stockholders’ equity of 20% or better to be outstanding. Biogen has achieved that nine years in a row, and last year it notched more than 40%.

Because of the looming patent cliff, Biogen shares sell for only eight times earnings. That’s bargain territory, and I’m willing to bet on the company’s research prowess to refill the pipeline.

Southwest Airlines

Right now, people are afraid to travel and afraid to be cooped up on a closed plane with a bunch of other people, one of whom might have coronavirus. How long will that problem persist? My guess is 18 to 24 months.

That’s a long time to wait, but I think Southwest Airlines Co. (NYSE:LUV) has big capital gains potential for patient holders. At about $32 a share (down from over $60 in parts of 2017 and 2018), it sells for nine times the past four quarters’ earnings. Its normal multiple is about 17.

By reputation, Southwest has the best fleet management in the airline industry. While many airlines struggle for profit, Southwest scored a return on equity above 20% five years in a row through 2019.

Barnes Group

Barnes Group Inc. (NYSE:B) gets little press coverage and scant Wall Street coverage. Only seven analysts follow it, and only three of those recommend it.

The company based in Bristol, Connecticut makes engineered parts for industrial and aerospace customers. It has shown a profit in each of the past 15 years, and its stock normally sells for about 19 times earnings. The multiple is only 12 now.

In a reversal of the pattern of recent years, a few Barnes insiders have purchased the stock recently and none have sold.

Moog

Like Barnes, Moog Inc. (NYSE:MOG.A) is an industrial company with a history of consistent but not spectacular profits. Headquartered in East Aurora, New York, its specialty is fluid-handling and motion control systems. Its customers are industrial, aerospace and defense companies.

Moog shares currently fetch about $49. As recently as late February, they were trading above $80. The price-earnings multiple normally is around 18; today it’s 9.

Past year

The recommendations in my Casualty List column from one year ago weren’t produced a 1.7% loss. Meanwhile, the S&P 500 advanced 3.7%.

National Beverage Corp. (NASDAQ:FIXX) advanced 37% and Albemarle Corp. (NYSE:ALB) had a moderate gain. But big losses on Gap Inc. (NYSE:GPS) and Walgreens Boots Alliance Inc. (NASDAQ:WBA) threw the train into reverse.

Disclosure: I own Biogen personally and Biogen call options in a hedge fund I manage. One of my clients owns National Beverage. I own Apple and Disney personally and for most of my clients.

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 protected].

About the author:

John Dorfman
John Dorfman founded Dorfman Value Investments in 1999. Previously he was a Senior Special Writer for The Wall Street Journal, executive editor of Consumer Reports, and a managing director at Dreman Value Management. His syndicated column appears on Tuesdays on this website and also in the Pittsburgh Tribune Review, Ohio.com, Virginian Pilot and Omaha World Herald.

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Rating: 4.3/5 (3 votes)

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Praveen Chawla
Praveen Chawla premium member - 1 week ago

Great ideas.

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