ShareThis Page
News Columnists

Banged-up stocks may be headed for rebound

John Dorfman
| Sunday, Jan. 22, 2012

Some people like to care for injured birds. I like banged-up stocks.

That's why each quarter I compile a Casualty List of stocks that have taken big hits the quarter before. These are stocks that in my view have been punished too much, and have rebound potential.

The list you are about to read is the 35th one I have compiled, beginning in 2000. (I missed a few quarters, mostly because of my temporary retirement as a columnist.)

Twelve-month returns can be calculated for 31 of the previous lists. Twenty-two of them beat the Standard & Poor's 500 Index, and 24 were profitable.

On average, the previous lists have shown a 12-month return, including dividends of 26 percent, compared with 6.3 percent for the S&P 500. That illustrates my thesis that it pays to buy banged-up stocks if you believe the problems depressing them are temporary.

The results for my column recommendations are theoretical, and don't reflect taxes or transaction costs such as commissions.

In the fourth quarter of 2011, about 85 percent of all stocks rose. But among the decliners are a few stocks that interest me.

The largest is Oracle Corp. (ORCL) of Redwood City, Calif. A software leader, Oracle specializes in databases and servers. Its shares fell 10 percent in the fourth quarter.

Oracle fell mainly because its earnings for the fiscal second quarter (ended Nov. 30) disappointed investors. The company earned 43 cents for the quarter; analysts had expected 45 cents.

Never mind that the 43-cent figure was the best Oracle had ever posted in the November quarter. I think investors put too much emphasis on the rite of companies beating analysts' expectations.

Right now, Oracle shares fetch 14 times the company's per-share earnings. The average for the past decade has been 20 times earnings, so the stock is cheap relative to its own history.

Newmont Mining Corp. (NEM) fell about 5 percent in the quarter. The Greenwood Village, Colo., company is the largest gold producer based in the United States, and one of the five largest in the world.

There is no mystery about why Newmont shares fell. Spot prices for gold dropped from a peak of $1,900 per ounce in early September to a low of $1,546 at year-end.

I still believe the long-term trend for gold is up. As investors watch Congress and various European legislatures struggle with debt issues, they will want something they perceive as safer than paper currency.

At its recent share price of $63, Newmont sold for 14 times earnings. That's compared with a 10-year average P/E ratio of 44.

My third Casualty List pick is Chesapeake Energy Corp. (CHK) of Oklahoma City, a major natural-gas producer. Chesapeake shares fell 13 percent in the fourth quarter, on top of similar declines in the two previous quarters.

No one wants to go near natural-gas stocks at the moment, mainly because the spot price of natural gas for future delivery has fallen to $2.57 per million British thermal units recently from more than $11 at the 2008 peak.

A shortage of natural gas in the United States has turned into a glut, as many promising deposits have been found in shale formations, including the Marcellus.

Am I crazy to recommend a natural-gas stock in these circumstances• Perhaps. But the lower natural-gas price is already causing some consumers and businesses to switch to gas from oil or coal, and I expect that trend to continue.

Chesapeake just posted a record quarter for revenue ($3.3 billion) and profit ($922 million). Perhaps someone forgot to tell the company that it is in a terrible business.

TribLIVE commenting policy

You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.

We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.

While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.

We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers

We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.

We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.

We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.

We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.

click me