The stock market came in like a lamb and went out like a hyena in the third quarter. Gains in July and August were followed by a slide in September.
When the dust settled, some stocks had been knocked down to what I consider attractive levels. Identifying such stocks is the point of my quarterly Casualty List. Today I’ll talk about four stocks banged up in the third quarter that I think can recover and thrive.
18% average return
Today’s Casualty List is the 74th in a series that began in 2000. One-year returns can be calculated for 70 of the lists.
The average one-year total return on my Casualty List picks has been 18.0%, which compares well with the 11.3% average return on the Standard & Poor’s 500 Total Return Index.
Forty-six of the lists have been profitable and 37 have beaten the S&P 500.
Bear in mind that my column results are hypothetical: They don’t reflect actual trades, trading costs or taxes. These results shouldn’t be confused with the performance of portfolios I manage for clients. Also, past performance doesn’t predict future results.
My Casualty List selections from a year ago did well, with a 44.3% return, versus 29.7% for the index. Two banks -- Cathay General Bancorp (CATY, Financial) and Bank of Hawaii Corp. (BOH, Financial) propelled the gains, advancing 87% and 63% respectively. Cigna Corp. (CI, Financial) returned 19% and PC Connection Inc. (CNXN, Financial) 9%.
Now for some new Casualty List picks.
Micron Technology
It’s hard not to like a semiconductor stock associated with a potato king. That’s Micron Technology Inc. (MU, Financial), based in Boise, Idaho, which was started in 1980 with funding from French fry monarch J.R. Simplot.
Micron specializes in memory and data-storage chips. These are less glamorous than the chips used for central processing units, graphics, imaging and cybercurrency mining. That’s why Micron sells for a relatively modest multiple of earnings, currently 14.
Micron shares fell 16% in the third quarter. The company lowered its guidance for future earnings, and 10 analysts lowered their price targets.
In my view, this is a normal part of the game in a volatile industry. With the stock at about $71, down from about $95 in March, I think it looks good.
ViacomCBS
ViacomCBS Inc. (VIAC, Financial) took a wild ride early this year, flogged by the speculators who frequent the Wall Street Bets Forum on Reddit.com. The shares broke above $100 in March, but have fallen back to about $40. The third-quarter drop was 12%.
I was a seller at prices above $70, but am a buyer at around the present price. I see great value in the company’s trove of some 3,600 movies and 140,000 TV episodes.
ViacomCBS has been profitable in 14 of the past 15 years, the exception being the recession year of 2008. Lately it is earning just above 10% on total capital, which is the level I consider good. At less than eight times earnings, it’s a bargain in my opinion.
Land’s End
A whopping 43% tumble in the third quarter left clothing retailer Land’s End Inc. (LE, Financial) selling for less than $24 a share, down from $43 in July.
CEO Jerome Griffith said last month that the company is facing major supply chain problems. Consumer demand is strong, he said, but “countries that are important for manufacturing, like Vietnam” are suffering factory closures due to the Covid-19 pandemic.
Shipping containers can cost up to four times as much as they did a year ago, he said, and ships are stacked up waiting to get into harbors.
I think the stock’s decline is overdone. This is one retailer that’s not overly tied to brick-and-mortar stores; it gets a large proportion of its sales online. It has shown a profit in eight of the past 10 years, and the stock sells for just under 0.5 times revenue, which is low compared to peers.
Newmont
Based in Denver, Newmont Corp. (NEM, Financial) is the world’s largest gold producer by volume. I am moderately bullish on gold, because I believe the relentless printing of money by central banks in the U.S., Europe and Asia will give more value to an asset viewed as “hard money.”
Rising interest rates are a threat to gold, because bonds and bank deposits compete with gold for the dollars of conservative investors. That, I believe, accounts for the 14% decline in Newmont’s share price in the third quarter.
Nonetheless, on balance I think the outlook is favorable for the yellow metal in the coming year, and particularly for Newmont, which is selling for less than eight times earnings.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].
