Smacked and whacked.
Every quarter, investors dump some stocks without mercy. Some of these stocks get hurt worse than they deserve. Identifying wounded stocks with strong recovery potential is the job of my quarterly Casualty List.
The column you’re reading contains my 57th Casualty List. I started this series in 2000. Twelve-month returns can be calculated for 53 of the lists, and the average 12-month return has been 19.0%.
That compares favorably with the 9.4% average return on the S&P 500 Index for the same 53 periods. Of the 53 lists, 38 have been profitable and 31 have beaten the S&P 500.
My picks from a year ago produced gratifying results, with a 55.6% return as against 19.9% for the index. Autohome Inc. (ATHM, Financial), a Chinese internet car-information company, turned in a 113.7% gain. Apple Inc. (AAPL, Financial) contributed a 58.9% return and John B Sanfilippo & Son Inc. (JBSS, Financial), a nut seller, chipped in 57.8%.
The sole loser among my year-ago recommendations was Cal-Maine Foods Inc. (CALM, Financial), the largest U.S. egg producer, which laid an egg with an 8.0% loss.
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.
Barrick Gold
I continue to believe that searching for bargains among beaten-up stocks is a good prospecting method. So here are my picks for the 57th Casualty List.
Barrick Gold Corp. (ABX, Financial), the largest gold producer based in North America, was down 16% in the second quarter, while the S&P 500 was up just over 3%.
The price of gold fell in the quarter, but by less than 1%. Investors are more worried about Barrick’s falling production.
In my opinion, they are more worried than they should be. Barrick is, wisely in my view, selling off selected mines (or shares of mines) to reduce debt.
At the end of 2013 Barrick Gold’s debt was a little over $13 billion. Today it is below $8 billion, and the company has expressed the goal of bringing to $5 billion by the end of 2018.
Gold tends to do well in times of international turmoil, and holds its own pretty well in times of inflation. The risk of either (or both) seems reasonably high to me over the next two or three years.
Urban Outfitters
Stocks of retailers got slammed last quarter, as Amazon.com Inc. (AMZN, Financial) and other internet retailers gobble market share from brick-and-mortar store chains. Among the Injured were Bed Bath & Beyond Inc. (BBBY, down almost 23%), Foot Locker Inc. (FL, down 34%), and Hibbett Sports Inc. (HIBB, down almost 30%).
The one I’m going to recommend today is Urban Outfitters Inc. (URBN, Financial), which declined about 22%. The company is debt free. It has earned a 15% return on stockholders’ equity or better in 13 of the past 15 years, and just missed in the other two years.
The trend to internet sales shouldn’t hurt Urban Outfitters too badly, as it already gets about 37% of its sales online. The stock seems attractive at 11 times earnings and 0.6 times revenue.
Cooper Tire
I have owned Cooper Tire (CTB, Financial), which makes replacement tires for cars, from time to time in the past. In 1990 the average age of cars on U.S. roads was less than seven years; today it is more than 11. That should keep tire sales going at a fairly good clip.
Cooper had a return on equity of more than 20% in the past four quarters. I think investors may have treated it too harshly in knocking it down 18% last quarter.
Rowan
I think the energy industry will continue to struggle for at least a year. But after being smacked down 34% in the second quarter. Rowan Companies plc (RDC, Financial) is selling at a level that makes it a good speculation in my view.
Rowan is a contract driller. It has a mixture of land jobs and offshore jobs – a good thing in my view, as I expect offshore will take a long time to come back. The company is losing money now and will probably have a worse loss next year. But at 0.7 times revenue and 0.24 times book value I think it’s worth a shot.
Disclosure: At this writing, I have no positions in the stocks recommended in this article, but might take a position in Cooper Tire prior to publication. I own John B. Sanfilippo for one client, and own Apple as one part of an exchange traded fund for most 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].
