Recovery likely for wounded shares
By John Dorfman
Published: Tuesday, October 2, 2012, 12:01 a.m.
Updated: Tuesday, February 19, 2013
Now that the third quarter has wrapped up, it's time to compile my quarterly Casualty List.
In the Casualty List, I try to identify stocks that have been beaten up and that I believe can recover from their bruises and make significant capital gains. This column is the 38th Casualty List I have compiled since I began the project in mid-2000.
The average 12-month return (including dividends) for the Casualty List has been 23.8 percent, compared with 7.0 percent for the Standard & Poor's 500. That is based on 34 overlapping periods for which one-year results can be measured.
Of course, past performance doesn't guarantee similar results in the future. The results of my column recommendations shouldn't be confused with the performance of real-money portfolios I run. And the column performance is theoretical, making no allowance for trading costs or taxes.
In fairness, I must admit that my Casualty List from one year ago was a dud. I had gains on Occidental Petroleum Corp. and NYSE Euronext, but lost about 24 percent in both Hewlett-Packard Co. and Cliffs Natural Resources Inc. Overall, that list fell 4.7 percent while the S&P 500 climbed 31 percent.
Last quarter was a good one for stocks, with the S&P 500 up 6.35 percent including dividends. To be considered for the Casualty List, however, a stock had to move in the opposite direction — falling 10 percent or more. Fewer than 3 percent of stocks fell that much.
Among the wounded warriors of the third quarter, I find quite a few stocks I like.
One is Intel Corp. (INTC), the world's largest maker of semiconductor chips. It is highly profitable, with a 25 percent return on stockholders' equity last year.
Its debt is only 15 percent of equity, putting Intel among the strongest quarter of U.S. companies in that regard. And the shares sell for less than 10 times earnings, meaning that Intel is a bargain, in my view.
Intel shares were roughed up for a 15 percent loss last quarter. Demand for chips fell short of expectations, and Intel expects third-quarter revenue to be about $13.5 billion or less, compared with the $14.2 billion that had been the Wall Street consensus. Nevertheless, Intel's revenue doubled in the past decade, and I think the long-term uptrend is intact. I own Intel for most of my clients.
Norfolk Southern Corp. (NSC), like Intel, saw its stock drop after it warned that third-quarter results wouldn't be up to expectations. The railroad company's stock fell 11 percent for the quarter.
At the current price of about $64, Norfolk Southern sells for 11 times earnings and yields 3 percent in dividends. That seems attractive to me, considering how profitable the railroad is. Last year, it posted an 18 percent return on stockholders' equity and a 26 percent pretax profit margin.
One of the main things Norfolk Southern carries is coal. Recently coal has lost a lot of market share in power generation to natural gas, because gas has been unusually cheap. I expect a partial reversal of that trend, which could help the railroad.
Gentex Corp. (GNTX), based in Zeeland, Mich., makes rear-view and side-view mirrors for cars that automatically dim when there is headlight glare. In the past 10 years its stock has sold for an average of 23 times earnings. Right now, after a decline of 19 percent in the third quarter, it sells for about 14 times earnings.
That's a good multiple considering that Gentex may get a boost from new car-safety requirements. All new cars sold starting in 2014 will have to have rear-view cameras. However, it's not yet clear how many manufacturers will put the rear-view camera in the mirror, as opposed to in a center display near the radio. Gentex makes units where the camera output is displayed in a mirror.
Gentex is debt-free, a quality I relish.
Guess? Inc. (GES) was a hot brand of jeans and casual clothes in the mid-2000s, when its sexy advertising struck a chord with affluent young buyers. Now it has gone cold. Or at least its stock price has.
The stock, which rose 180 percent or more in each of the years 2003, 2005 and 2009, was down 35 percent last year. It fell 16 percent in the third quarter.
Yet the company isn't doing that badly. It has almost no debt, had a pretax margin near 15 percent last fiscal year, and had a return on stockholders' equity of 24 percent. I like the stock at the current price of about $25, which works out to just 10 times earnings.
John Dorfman is chairman of Thunderstorm Capital and can be reached at firstname.lastname@example.org .
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