Interpublic, Cirrus Logic on casualty list
Falling knives, anyone?
Wall Street wisdom says, “Don't try to catch a falling knife,” but I pretty much do it quarterly. My Casualty List contains stocks that have been beaten up in the previous quarter, and that I think have strong potential to bounce back.
The Casualty List you're about to read is the 58th one I've written since I started the series in 2000. One-year returns can be calculated for 54 columns. The average one-year return has been 18.4 percent, compared to 9.6 percent for the Standard & Poor's 500 Index over the same 54 periods.
The stock recommendations in 38 of the 54 columns have been profitable. They have beaten the S&P 31 times and trailed it 23 times.
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.
My picks from a year ago did poorly, declining 13.7 percent while the index was up 19.6 percent. My only winner from the Oct. 4, 2016, column was First Solar Inc. (FLSR). But Pearson PLC (PSO), FTD Companies Inc. (FTD) and Gannett Co. Inc. (GCI) all lost ground.
Bloody but not discouraged, I'm ready to try again. Here are four stocks that fell 15 percent or more during the third quarter even as the market rose. I think they all look good for the coming 12 months.
Interpublic Group of Cos. Inc. (IPG) is one of the larger U.S. ad agencies, at a time when advertising revenue industrywide has been slowing. A 15 percent decline for Interpublic shares in the third quarter wiped out the gains of the three prior quarters, and left the stock near $21, below its level at the end of 2015.
Newspapers, magazines, radio and TV used to be the staples of this industry. Now Internet advertising is becoming dominant. The rules are different, the profits are skinnier, and the need for ad agencies arguably is less acute, since Internet sites supply advertisers with their own metrics.
I believe that Interpublic and other leading agencies will find ways to add value for their clients, and that the profit stall may not last much longer. Interpublic is still very profitable. At 15 times earnings, and with a dividend yield of 3.5 percent, I believe it is a good buy.
Down 15 percent in the latest quarter, Cirrus Logic Inc. (CRUS) is a semiconductor company that specializes in audio chips. Mobile phones and car radios are two of the company's biggest markets.
The company issued conservative profit guidance recently, but frankly the stock's decline puzzles me. Here is a company that has grown its revenue by 30 percent a year for the past decade — and 38 percent in the past 12 months. Hardly a has-been.
Cirrus earned a sparkling return on equity of 27 percent in the past year, and the stock seems modestly valued at 13 times earnings.
Once a glamor stock, Cheesecake Factory Inc. (CAKE) fell 16 percent last quarter and is down 37 percent from its high just five months ago. In the latest reported quarter (June), earnings inched up less than 1 percent from the same quarter a year earlier.
Yet growth in the company's book value (corporate net worth per share) has actually accelerated lately, to 8 percent from an average of 4.6 percent over the past 10 years.
Of 21 Wall Street analysts who follow the stock, only five recommend it. But to me, this debt-free company looks tasty at just under 15 times earnings.
More speculatively, I recommend Tahoe Resources (TAHO) of Reno, Nev. It mines gold, silver and a little bit of zinc and lead. Its mines are in the United States, Canada and Guatemala.
Tahoe stock plummeted 41 percent last quarter, mainly because its Guatemala gold mine was shut down, at least temporarily, by a court ruling that it hadn't sufficiently consulted with indigenous people living near the mine.
Like many mining companies, Tahoe has not been earning impressive profits lately. But I think precious-metals prices will rise over the next couple of years. I think we will be in a period of geopolitical instability and perhaps some inflation. Those conditions may be good for gold.
Tahoe shares sell for eight times earnings and 0.6 times book value (corporate net worth per share). By contrast, the S&P 500 Index hovers near 22 times earnings and 3.2 times book.
Disclosure: I own Cheesecake Factory shares for a few of my clients and Interpublic Group for one client.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Mass., and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.