John Dorfman: CVS, GameStop are on my casualty list
If you're one of those people who would never buy a stock that's been going down, you're missing some opportunities.
You may feel that if a stock has been declining, “there's something wrong with it.”
Well, of course there is. But the problem may be temporary, or solvable, or already fully reflected in the stock price.
That's why each quarter I compile a Casualty List. It is made up of stocks that have been pummeled in the latest quarter and which I think have excellent potential for recovery.
The results of the Casualty List strongly suggest that you shouldn't rule out stocks that are in adverse trends.
18.72 percent average
Today's Casualty List is the 60th one I've compiled since mid-2000. Twelve-month results can be calculated for 56 lists.
The average 12-month total return on the Casualty List stocks I've recommended has been 18.72 percent.
That compares quite favorably with the 9.99 percent average return on the Standard & Poor's 500 over the same 56 periods.
Of the 56 Casualty Lists, 40 have been profitable, and 32 have beaten 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.
The list from a year ago was a dud. I had nice gains in University Insurance Holdings Inc. (UVE) and Waddell & Reed Financial Inc. (WDR). But big losses in Essendant Inc. (ESND) and Transocean Ltd. (RIG) ruined the results. Net return: 2.86 percent, trailing the S&P's mark of 14.42 percent.
There was no shortage of casualties in the first quarter. The S&P 500 fell fractionally (even taking dividends into account). More than 800 stocks with a market value of $250 million or more fell at least 10 percent. I will recommend four of them here.
CVS Health Corp. (CVS) is one of the two biggest U.S. drugstore chains, along with Walgreens Boots Alliance Inc. (WAG). I like CVS's “minute clinics,” where you can be seen by a nurse, usually without a long wait. And I like CVS's proposed acquisition of Aetna, even though it will inflate CVS's debt.
The stock fell 14 percent in the first quarter. I think the reason is that investors fear new low-cost competition from Amazon.com Inc. (AMZN) and its partners in a yet-to-be-defined health care venture. I think the newcomers will find that lowering health care costs is a thorny tangle.
Here's one you may think is crazy. At today's price — less than $13 a share, down 29 percent in the first quarter — I like GameStop Corp. (GME), a retailer of video gaming equipment and software. Yes, I'm aware that gamers can download games from the internet. That's why GameStop's revenues haven't grown in the past five years. Yet they haven't shrunk much either.
Is GameStop selling buggy whips in the age of cars? Maybe, but it will take a while for this business to fade away. And the stock is dirt cheap. It sells for less than four times earnings and offers a dividend yield of about 12 percent.
Down 49 percent in the quarter was Nutrisystem Inc. (NTRI), which calls itself an “online weight loss community” and sells prepackaged diet meals through retailers. The company largely blamed lower viewership at the TV networks through which is advertises.
That's not the whole story, but I believe investors overreacted to the company's negative forecast for 2018. Some of the stock's recent decline probably stems from profit-taking after the shares rose five years in a row, more than quintupling in the process.
At more than $60 a share in 2017, the stock was probably ahead of itself. But at today's price of about $27, it looks pretty reasonable to me.
Let's face it, NL has often been a struggling company. Its revenue has shrunk in recent years, and it posted losses in 2003, 2007, 2009 and 2013. Based in Dallas, the company is a mini-conglomerate. It makes computer stands, titanium dioxide pigments, locks and ball-bearing slides.
One thing investors don't like is that NL doesn't control its own destiny. It is majority owned by Valhi Inc., which was for years controlled by the late Harold Simmons, a major Republican donor and foe of former President Barack Obama.
On the plus side, NL is usually profitable, was very profitable last year and has almost no debt. The stock, down 45 percent last quarter, sells for less than five times earnings.
Disclosure: One of my clients owns shares in Waddell & Reed.
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 firstname.lastname@example.org.