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'New lows list' offers a few gems

About John Dorfman
Picture John Dorfman 617-542-8888
Freelance Columnist
Pittsburgh Tribune-Review

John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. His firm or clients may own or trade securities discussed in this column.

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By John Dorfman

Published: Tuesday, Oct. 1, 2013, 12:01 a.m.

Where can you find stock-market bargains?

One place to look is the “new lows list,” which is a daily list of stocks that are selling at their lowest price in the past 52 weeks. Stocks that are out of favor and scorned by investors can sometimes be excellent picks.

Over the years, beginning in 1998, I have written 18 columns recommending a few stocks from the new lows list. This is the 19th.

On average, my bottom-fishing recommendations have achieved a 20 percent return over three years, compared to 10.1 percent for the Standard & Poor's 500 Index. Three-year results can be measured for 15 of those columns.

One-year results, however, are not as good. In a one-year time frame, my picks have averaged 6.6 percent, trailing behind the 8.5 percent for the S&P 500. The one-year measurements are available for 17 columns.

This suggests that if you want to troll for bargains on the new lows list, you'd best be prepared to wait a while for a company's fortune to turn or for the public's perception of the company to improve.

For today's recommendations, I scanned the new lows lists for Sept. 25, 26 and 27. I found three that I feel have excellent prospects for a three-year haul and decent-to-good prospects for the coming year.

American Eagle Outfitters

Based in Pittsburgh, American Eagle Outfitters Inc. (AEO) caters to older teenagers and young adults.

It operates about 900 retail stores under its flagship brand, and 150 or so under the Aerie brand. Aerie sells intimate apparel and personal care products for girls and young women.

During the past 10 years, American Eagle has increased sales and earnings at about a 10 percent annual clip. The past five years have brough a slowdown in those rates. However, I believe American Eagle has a strong brand, a reasonably loyal customer base and good marketing sense.

At 13 times earnings, I think this wounded eagle has the potential to fly high again.

Cloud Peak Energy

I am intrigued by the coal industry, because it has been pummeled for the past three years. New environment restrictions probably will assure that coal will never again generate half of the electricity in the United States, as it did in the past.

But coal has made a minor comeback, bouncing back up to 40 percent of electrical power generation from a figure in the high 30s. I think it will continue that comeback, and I believe that the United States is capable of exporting a good deal more coal than it now does.

This leads me to recommend Cloud Peak Energy Inc. (CLD) of Gillette, Wyo., whose coal generates about 4 percent of the nation's electricity. It mines coal in Wyoming and Montana, and its coal has a relatively low sulfur content.

While many coal mining companies stagger under an excessive debt load, Cloud Peak's debt load is less onerous than most. The stock's valuations are alluring to a cheapskate like me. It sells for less than seven times earnings, about 0.6 times revenue, and slightly less than book value (corporate net worth per share).

J.C. Penney

My final pick will make many people say I'm crazy. It is J.C. Penney Co. (JCP), the struggling retailer. Penney lost $1.35 a share in 2012 and is expected to post another loss this year, but a narrower one, perhaps about 65 cents a share.

Analysts expect Penney to be back in the black in 2014 to the tune of about $1.35 a share. That's far below what the company earned in its good years. In 2006 and 2007, for example, it earned more than $6 a share.

Many professional investors are furious at Penney at the moment, because it did what they consider a head fake, saying that things were improving, then turning around and raising money by selling new stock, diluting the value of existing shares.

Of 24 Wall Street analysts who follow Penney, just seven recommend it. I view it as a risky stock, with some potential to go bankrupt. But I think it will probably survive and gain some traction with new initiatives, such as “shops” within the department stores that feature a particular well-known brand.

The stock has fallen to about $9 from about $15 two months ago and more than $30 in most of 2011. It's a rank speculation at this point, but I think a reasonable one.

Those are my bottom-fishing recommendations for today. I'll have a performance update in March, and new selections then.

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

 

 
 


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