Finding Opportunity in This Year's Decline

Here are 5 stocks that have been hit hard this year

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May 31, 2022
Summary
  • You can sell some stocks with losses, possibly reaping a tax deduction.
  • You can replace them with good stocks selling for 15% to 30% below their highs.
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The stock market coughed up 17% of its value from Jan. 3 to May 24. That provides investors with an opportunity for a portfolio upgrade.

You can sell some stocks with losses, possibly reaping a tax deduction. And you can replace them with good stocks selling for 15% to 30% below their highs.

Here are five stocks that have been hit hard this year, and are now buys in my judgment.

Could they go down further? Of course they could. Catching the exact bottom is a matter of luck. Nonetheless, I feel that if you buy these now, you will be glad you did.

Applied Materials

Based in Santa Clara, California, Applied Materials Inc. (

AMAT, Financial) is the world’s largest supplier of semiconductor manufacturing equipment. The stock peaked in January at about $167. It sells for less than $120 now.

Does anyone doubt that semiconductor chips will stay in high demand? Computers, smart phones, appliances and cars are all using more chips, and more advanced chips, as time goes on

While the stock has been smacked, the company is doing fine. Sales rose 28% last year and profits were up 56%.

So what ails this stock? As interest rates rise, a dollar of earnings in the future – say, in 2029 – becomes worth less. So growth stocks have been punished, especially technology.

As of May 27, Applied Materials shares sold for 16 times earnings. That seems to me quite a reasonable valuation for a company that has grown its revenue at a 14% annual pace for the past decade, and earnings considerably faster.

D.R. Horton

The largest U.S. homebuilder, D.R. Horton Inc. (

DHI, Financial) has fallen 29% this year through May 27. The entire homebuilding group has been whacked – and for logical reasons, but I believe the selling has been overdone.

What investors fear is that mortgage rates will rise, choking off home buying. It is a rational fear, but it has pounded Horton’s price down to five times earnings, which is extremely cheap.

Home prices have risen a lot in the past two years, pricing out some potential buyers. But I think demographics are on the side of the homebuilders. Millennials are coming of age. Like many of their parents, they may want single-family homes for their children.

Horton’s return on invested capital has been above 10% (my preferred zone) for five years in a row.

Brunswick

Selling about 35% below its high is Brunswick Corp. (

BC, Financial), which makes boats, outboard motors, fitness equipment and billiards gear. I think investors harbor two fears about Brunswick. One is that a recession will come soon, crippling sales of all recreational gear, especially boats.

I believe there will be no recession in 2022. The leading economic indicators (designed to be predictive) are still pointing up, and the coincident (real time) indicators are healthy.

The other fear arises from the fact that Brunswick benefitted from the pandemic. Boating is outdoor recreation, relatively safe from Covid-19. When the pandemic ebbs, people think Brunswick’s profits may tail off.

The pandemic probably did help Brunswick, which earned 20% on invested capital last year. But the return was above 10% in 10 of the past 12 years.

Target

Target Inc. (

TGT, Financial) shares fell almost 25% in a single day on May 18. It reported a bad first quarter, as its costs for goods, shipping and labor rose. Like many retailers, it does not dare to raise prices commensurately, fearing that shoppers will flee.

One of my mantras is to look for stocks depressed on bad news that is real but temporary. I think Target’s troubles fit that description, even though the problems may last for a while.

Target has exceeded my target for return on invested capital (10% or better) in 10 of the past 15 years. I don’t expect a recession, but if one should hit, Target is among the better places to be, since consumers trade down to Walmart (

WMT, Financial) and Target from pricier stores.

MKS Instruments

Down 31% this year through May 27, MKS Instruments Inc. (

MKSI, Financial) makes instruments and process control systems used in manufacturing semiconductors, flat panel displays, medical devices and other things.

MKS, which is based in Andover, Massachusetts, has been profitable in 14 of the past 15 years, and has beaten my return on capital guideline 10 times.

Since the company’s sales and earnings have been strong lately, I regard the stock as another casualty of the technology sell-off. At 12 times earnings, I think it is a bargain.

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].

Disclosures

I am/we currently own positions in the stocks mentioned, and have NO plans to sell some or all of the positions in the stocks mentioned over the next 72 hours. Click for the complete disclosure
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