John Dorfman: Molina and Great Lakes have jumped, still look good
When a stock jumps 50% or 100% in a year, you know something is afoot.
Maybe the company is firing on all cylinders. Maybe the stock was radically mispriced a year ago. Perhaps both.
Once a year, around this time, I select a few stocks that have exploded upward and that I believe still have something in the tank.
In the past, I usually looked for stocks that had doubled in a year. But this year there are few of those — and very few that I like. So, I opened the field to stocks up 50% or more in the past 12 months.
Here are three that I think deserve a look.
Many health care companies experience the possibility of “Medicare for All” as a threat, but for Molina Health Care Inc. (MOH) of Long Beach, Calif., it’s arguably a plus.
Molina runs managed-care programs in 14 states, catering to people enrolled in Medicare or Medicaid. Over the past 10 years, its growth rates for revenue and operating income have been in the mid-teens.
Since Molina already is used to having the government as its source of funds, the possibility of something resembling national health insurance isn’t a big threat to its margins. It might even be a competitive advantage.
The shares are up about 57% in the past year, and currently sell for 11 times earnings and 0.5 times revenue.
For better or worse, I think national health insurance is a long shot in the next couple of years, even if Democrats consolidate their power in Congress. However, due in part to cost cutting, Molina is showing its best profits in a long time, even without Medicare for All.
PCM Inc. (PCMI) sells computer products and services to businesses, especially retailers, health care companies and financial companies. It’s a low-margin business, with profit margins hovering a little above 1% after tax.
What’s hot here is the growth. Operating income more than doubled in the past 12 months. The stock price zoomed from $12.20 at the beginning of May 2018 to about $26 now.
The stock sells for about 10 times this year’s estimated earnings and less than 0.2 times revenue, so I suspect there is room for more gains.
Great Lakes Dredge
Great Lakes Dredge & Dock Corp. (GLDD) has moved up from a little over $5 a share to a little over $10 in the past year. The company, based in Oak Brook, Ill., deepens ports, channels and rivers and digs trenches for pipelines and cables.
The stock is speculative. The company’s debt is rated in the junk range by Moody’s, although it was recently upgraded. Debt is 135% of stockholders’ equity, which is higher than I’d like.
But there are good things here, too. If the two major political parties stop feuding long enough to pass an infrastructure bill, Great Lakes might benefit. Analysts expect earnings to jump this year. And the stock sells for just under 1.00 times revenue.
I disagree with momentum investing – the concept that a rising stock price, per se, is a good reason to buy a stock.
If a stock has a big gain, the company has probably established a competitive advantage. That advantage may be durable or merely transitory. That’s what makes securities analysis hard — and fascinating.
My view is that a big gain isn’t a reason to jump onboard, but it’s not a disqualifier either.
This is the 12th column I’ve written on stocks that have risen sharply and appear to have potential for continuing gains. Six of the previous 11 columns have beaten the Standard & Poor’s 500 Index.
However, after two terrible years in a row, my average one-year return has fallen below that of the benchmark. It’s 8.7% against 11.5% for the S&P 500.
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.
Last year’s results were hideous, with losses exceeding 40% in Micron Technologies Inc. (MU), HollyFrontier Corp. (HFC) and Daqo New Energy Corp. (DQ). Collectively, my May 2018 picks dropped 40.5%, while the S&P 500 advanced 7.2%.
Will I try again? If you know me at all, you know the answer is yes. We’ll see if this year’s picks put me back on the right side of the ledger.
Disclosure: I own Daqo New Energy Corp. personally and for a few clients.
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 via email.