A Wake-Up Call for Bargain Hunters

What goes down doesn't necessarily come up again

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Apr 04, 2022
Summary
  • After a rough first quarter, dozens of stocks have descended to what I consider attractive levels.
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For bargain hunters, every stock market cloud has a silver lining. After a rough first quarter, dozens of stocks have descended to what I consider attractive levels.

I’ve put five of them on my Casualty List, a quarterly roster of stocks that have been beaten up and that I believe have good comeback potential.

Take Lennar Corp. (

LEN, Financial), for example. The homebuilder fell 30% in the first quarter, as investors started to worry about rising mortgage rates and house prices that have climbed out of some buyers’ reach.

Are things that bad? Lennar’s profit in the fiscal year that ended in November was $14.27 a share, close to double its best previous year. For the latest four quarters (ended in February), the figure was $12.77.

Are mortgage rates climbing? Sure they are, but they are still below the levels that have prevailed for most of my life. I think that millennials, as they start to have kids, are likely to want single-family homes.

Next, consider Stanley Black & Decker Inc. (

SWK, Financial), which likely made the sander and drill you used in your last home-improvement project. It dropped 26% in the first quarter.

Dividend King

Many investors know the term “dividend aristocrat,” used to describe companies that have raised their dividend 25 years in a row. Stanley Black & Decker isn’t just a dividend aristocrat, it’s a dividend king with a better-than 50-year streak. Fewer than 40 companies can claim that distinction.

Operating results were weak in the fourth quarter, but management is fairly optimistic about this year. I haven’t known the management team (which includes James Loree as president and Donald Allan as chief financial officer) to be hype artists.

Another bargain in my view is Quest Diagnostics Inc. (

DGX, Financial), which fell 21% from January through March. Lots of investors feel that medical testing companies will lose business once the pandemic is over.

That may be, but I think the drop-off, when it comes, may be less severe than expected. I believe we have entered a world in which more people take more medical tests more of the time.

Quest’s return on invested capital was more than 16% in the past four quarters. I consider 10% good.

Then there’s Western Digital Corp. (

WDC, Financial), which makes data storage products. It lost 24% of its market value last quarter.

One problem is that computer makers are moving to solid state drives, rather than the hard disk drives that have been Western Digital’s bread and butter. In hard disk drives, Western enjoys a worldwide duopoly with Seagate Technology Holdings PLC (

STX, Financial), but in solid state drives it’s one of many competitors.

That’s not a new problem, however. Despite it, Western Digital has managed to post a return on invested capital above 10% in each of the past three reported quarters.

Finally, I call your attention to LKQ Corp. (

LKQ, Financial), which is in the business of junking cars and selling their parts. The Chicago-based company saw its stock decline 24% in the latest quarter, even as operating results remained strong.

Cory Cramer, author of Cyclical Investors’ Club, posted an article on Seeking Alpha in January saying that he sold the stock because he sees danger of a “boom-bust cycle.” Among other things, he noted that the government stimulated the economy last year and is yanking away stimulus this year.

Boom or bust? In my opinion, LKQ has a steady business. It has posted a profit 21 years in a row, soon to be 22.

Past results

This is the 76th Casualty List I’ve compiled. I’ve calculated one-year returns on 72 lists, as the others are too new to do that.

The average one-year return has been 17.5%, which compares very well with 11.5% for the Standard & Poor’s 500 Total Return Index. Both figures include dividends.

Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.

Forty-seven of the lists have been profitable and 38 have beaten the index.

My Casualty List from a year ago, however, was an unmitigated disaster. I picked only three stocks, and they all declined. The worst loss was 53% in Sage Therapeutics Inc. (

SAGE, Financial). LL Flooring Holdings Inc. (LL, Financial) fell 47% and Perdoceo Education Corp. (PRDO, Financial) dropped 7%.

What goes down doesn’t necessarily come up again. But in general, my Casualty List choices have done better than sit up and take nourishment. Many have not only recovered, but thrived.

John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, and a syndicated columnist. He or his clients may own or trade securities discussed in this column. He can be reached at [email protected].

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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