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Does past year foretell the future?

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Tuesday, Dec. 18, 2012, 12:01 a.m.
 

With less than two weeks left in the year, some big winners and losers in the stock market stand out.

But is the past prologue or a head feint? That is the question.

Through Dec. 14, the five best gainers in the Standard & Poor's 500 Index were:

• PulteGroup Inc. (PHM), up 172 percent.

• Sprint Nextel Co. (S), up 137 percent.

• Whirlpool Corp. (WHR), up 111 percent.

• Expedia Inc. (EXPE), up 105 percent.

• Bank of America Corp. (BAC), up 90 percent.

While the sun shone on those five big winners, shareholders of the following five stocks were left in tears:

• Apollo Group Inc. (APOL), down 61 percent.

• Advanced Micro Devices Inc. (AMD), down 56 percent.

• Best Buy Co. (BBY), down 48 percent.

• Cliffs Natural Resources Inc. (CLF), down 46 percent.

• Hewlett-Packard Co. (HPQ), down 43 percent.

After a memorable 2012 for each of these stocks, what does 2013 hold? I'll give you my best guess.

I expect PulteGroup, the country's second-largest homebuilder by market value, to have a rough January. Some investors who rode it up this year will cash in their chips once a new tax year begins.

For the full year 2013, I expect Pulte should be up moderately. Home sales are in the early stages of what I think will be a strong recovery, but investors have already caught on to this.

The main reason for Sprint's rise in 2012, as I see it, was takeover speculation. Takeover rumors proved largely true in October, when Softbank Corp. of Japan announced a plan to buy 70 percent of the company for about $20 billion.

But Sprint is not my kind of company – it will post its sixth consecutive loss in 2012 — and is expected to post a seventh consecutive loss in 2013. I'd avoid the stock.

Whirlpool's story the past couple of years has featured strong growth in Asia and Latin America, and slow or negative growth in the U.S. and Europe. In 2013, I think the United States and Europe will perk up. I expect a nice jump in Whirlpool earnings, but only a moderate gain for the stock, which has anticipated most of the good news.

Expedia, the online travel service, is up 105 percent this year and 183 percent since I recommended it in this column in April 2011. At today's price near $59, I think it's fairly priced or a bit more, and wouldn't buy it.

Bank of America has done better than I expected this year. I was expecting continued indigestion from the bank's acquisitions during the financial crisis in 2008 of Merrill Lynch and Countrywide. I'm not wild about management, but the stock is so cheap at 0.8 times tangible book value that it will probably continue to do well.

Let's turn next to the five biggest losers. I like three of the five.

Apollo Group, owner of the University of Phoenix with close to half a million students, derives most of its revenue from federal student loans and grants. I believe it is vulnerable to a potential federal crackdown, in which Uncle Sam objects to being left holding the tab on too many student loans – especially if the students didn't graduate.

As a result, even though Apollo stock is cheap at six times earnings and 0.6 times revenue, I wouldn't buy it.

Advanced Micro Devices is expected to post a loss this year and also had losses in five of the previous 10 years. Analysts expect slow improvement, but I wouldn't wait around for it. With debt at 126 percent of equity, I think the risks in the stock are too high.

Best Buy, on the other hand, appeals to me. I like its price/earnings ratio of four. Its balance sheet is okay, with debt less than 60 percent of equity. During the recession of 2007-2009, it got rid of a major competitor, Circuit City. And Best Buy's dividend yield is a rich 5.6 percent.

Cliffs Natural Resources is the largest iron miner in the United States and also mines some coal. I sold the stock early this year, but now that it is down 46 percent for the year and selling for seven times earnings, it looks like a strong buy to me. A 7 percent dividend yield adds to the appeal.

Hewlett-Packard is the most baffling stock to me in the whole list. I keep feeling that management should be able to improve the earnings trend, which has been negative in the past five years. Yet the turnaround is elusive, and management keeps changing – six CEOs in the past seven years.

With the stock selling for six times estimated 2013 earnings and 0.2 times revenue, and with Meg Whitman now in the CEO's chair, I will come down on the side of recommending the stock. But I've been wrong before on this one. I recommended it in October 2011, and it is down 34 percent since then.

John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist; jdorfman@thunderstormcapital.com

 

 
 


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