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John Dorfman

Dorfman: Best yet to come for some doublers

| Monday, May 26, 2014, 11:39 p.m.

Just because a stock has doubled, it doesn't follow that its best days are behind it.

Some people automatically sell half of any stock that doubles, reasoning that from that point on, they are “playing with the house's money.” I disagree with that approach.

Instead, I believe that investors should look at every stock in their portfolio with fresh eyes, weighing its merits against other opportunities available. In some cases, a stock that has doubled may have a lot of gas left in its tank.

Six times from 2001 to the present, I've written columns on stocks that have doubled and that I believe are still attractive. The stocks I recommended have shown a profit in five out of six cases and beaten the Standard & Poor's 500 Index four times out of six.

On average, my recommendations from this paradigm have shown total one-year returns of 19.7 percent, compared with 10.9 percent for the S&P 500 in the same six one-year periods.

The performance of my column recommendations is hypothetical and doesn't reflect taxes or trading costs such as commissions. Past performance doesn't predict future results. And the performance of my column picks shouldn't be confused with that of actual portfolios I manage for clients.

Last year's dud

The doublers I recommended a year ago haven't done well.

Orbitz Worldwide Inc. (OWW), an online travel service, is down 17 percent since my column of May 28, 2013. Tesoro Corp. (TSO), a refiner, has dropped 11 percent.

Stewart Information Services Corp. (STC), a title insurer, rose 8 percent. First Solar Inc. advanced 18.7 percent. Phillips 66, another refiner, did best, up 26.1 percent. Figures are total returns including dividends.

Averaging those five figures together, my doublers from a year ago achieved only a 5 percent return, compared with 16.9 percent for the S&P 500.

I am eager to try again. One thing I believe firmly is that a stock doesn't know where it has been. So it makes no more sense to dismiss a stock that has risen than to reflexively buy one that has fallen.

In the past 12 months, 91 U.S.-traded stocks with a current market value of $500 million or more have doubled. That's fewer than 4 percent of the universe of stocks that size.

I wouldn't buy many of them. Most are too expensive for my taste, and some have too much debt. But here are three that I like.

Delta Air Lines

Delta Air Lines Inc. (DAL) of Atlanta is benefiting from several trends that are helping the airline industry. Mergers among airlines have reduced the cut-throat price competition that has bedeviled the industry in the past.

Labor costs are less of a problem than they once were. Even pilots are making less than they used to. Yet Delta enjoys relatively good labor relations.

Fuel costs, which are always a major expense for an airline, appear to have stabilized, though Middle East politics could still throw a wrench into the works.

Delta has debt approximately equal to stockholders' equity, which is more debt than I'd like. However, the company has shaved its long-term debt from more than $15 billion in 2008-2009 to about $8 billion now, and I think the favorable trend will continue.

Pilgrim's Pride

I tend to be bullish on the chicken industry, reasoning that Americans' increasing health consciousness will favor chicken over pork and beef.

Chicken stocks tend to swing up and down from month to month and year to year, depending on the price of corn. When the corn that chicken companies feed their chickens goes up in price, profits shrink.

Last year was a great one for Pilgrim's Pride Corp. (PPC) of Greeley, Colo. It earned an astonishing 46 percent return on stockholders' equity.

That won't happen consistently, but the stock isn't priced as if heaven were at the gates. The shares sell for less than one times revenue and 11 times recent earnings.

YPF

The big Argentina oil company, YPF Sociedad Anonima (YPF), traded in the United States as an American Depositary Receipt, also interests me. It sells for 14 times earnings, less than 1.0 times revenue, and about 1.5 times book value (assets minus liabilities per share).

Only three of the nine analysts who follow YPF recommend it. I think they are mostly concerned about the broad risk picture for Argentina, which struggles with inflation and a weak currency. YPF, however, strikes me as a company that can survive such turmoil.

Another problem has been declining production. But the importation of horizontal drilling techniques is beginning to help.

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. He can be reached at jdorfman@thunderstormcapital.com.

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