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4 stocks have value, momentum

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Tuesday, Feb. 5, 2013, 12:01 a.m.
 

Why don't we wait to buy this stock,” a colleague asked, “until it has finished going down?”

We were sitting in an investment committee meeting some years ago. My colleague's view didn't prevail, because most of us believed that turning points can only be recognized in hindsight. We bought the stock in question, and it went down some more before it began to pay off.

My colleague's plaintive question echoes the feeling of many investors. They like to buy a stock when they see value, but also when they see some evidence that the stock is rising.

Personally, I will buy a stock whether it is rising or falling. But I know that many of my readers agree with my ex-colleague. So, about twice a year, I devote columns to stocks that exhibit both value and momentum.

This is the 22nd column in that ongoing series, which began in February 2000. One-year results can be calculated for 20 of the lists. Sixteen of the 20 lists have been profitable, and 13 have outperformed the Standard & Poor's 500 Index.

On average, the stocks on my Value-Plus-Momentum lists have gained 18.3 percent, while the S&P 500 has averaged 5.6 percent. The figures are total returns, including dividends.

Bear in mind that past performance may not predict future results. The performance of my column recommendations shouldn't be confused with those of real-money portfolios I run. Also, column results are theoretical and don't reflect transaction costs or taxes.

The latest list to be tallied, published on Feb. 7, 2012, was a flop. It fell 4.2 percent, partly because of a 19.6 percent tumble in Freeport McMoRan Copper & Gold Inc. (FCX), which I owned for clients at the time I selected it.

General Motors Co. (GM) was the best gainer on that list, up 7.4 percent, which was not enough to match the S&P's 14.9 percent advance. Spirit Airlines Inc. (SAVE) gained 3.1 percent, and Kraton Performance Polymers Inc. (KRA) lost 8.3 percent.

So what stocks show momentum now and also exhibit good value characteristics? I have four new ones for you.

Krispy Kreme Doughnuts Inc. (KKD) of Winston-Salem, N.C., is one of them. It has jumped from a little more than $6 a share last summer to almost $13, partly on takeover speculation.

I think this doughnut maker would be a tasty bite for an acquirer. But even if that doesn't happen, I think the stock is still a good value at six times earnings.

I'm not entirely objective about Krispy Kreme, because its CEO is Jim Morgan, whom I consider a personal friend. Over the years, I have both owned the shares and sold them short. Currently, I have no position.

Next is Western Digital Corp. (WDC), a maker of computer hard drives whose shares have zigzagged wildly in the past year. Its 2012 earnings of more than $8 a share were better than double the total of the year before. Even though the stock has moved up 40 percent in the past two months, it sells for only five times earnings.

Western Digital is part of a small oligopoly of disk-drive makers. I think investors accord it such a low multiple because they believe disk drives will become an obsolete technology. I believe that will take a long time, and I own the stock for almost all of my clients.

Up about 33 percent in the past two months is FreightCar America Inc. (RAIL), a Chicago company that specializes in coal-carrying cars, especially aluminum ones. A low price for natural gas in the past couple of years has hurt the demand for coal.

Now, the gas glut is beginning to ease, and coal is beginning to make a comeback. I think this bodes well for FreightCar America, which is debt-free and selling for 11 times earnings. Also, I believe the company has some potential as takeover bait.

My final selection is Marathon Petroleum Corp. (MPC), a large refiner based in Findlay, Ohio. Spun off from Marathon Oil Corp. in early 2011, Marathon Petroleum had an excellent 2012.

The number of miles Americans drive is an important influence on the fortunes of refiners. Mileage rose steadily for 20 years until it exceeded 3 trillion in 2006 and 2007. Since then, the trend has been mostly down, but there was an uptick — and perhaps a trend reversal — in 2012.

Although Marathon Petroleum was up about 43 percent in the past two months, it still sells for a reasonable multiple, eight times earnings.

John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at jdorfman@thunderstormcapital.com.

 

 
 


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