You like to bottom-fish. You know December is prime bottom-fishing season, and here we are. The market has had a decent year, with the S&P 500 up over 12.5% on a price basis, but 311 of the Russell 3000 stocks have declined by more than 25% in 2012. That's more than 10% of the market that is beaten and bruised. How can we narrow the field and look for some potential ideas for a trade or maybe even a long-term investment?
In mid-October, I suggested being patient but shared a methodology that resulted in about 42 names meeting the criteria. This is way too big a list to analyze, but I will note that the five names I highlighted (all on my watchlist) actually did bounce. Four of these five, though, made new lows after the article, and I ended up adding one of them to my Top 20 Model Portfolio just last week. The one that didn't make a new low? Clean Harbors (CLH). We got lucky with this one, as it announced a big acquisition a few days later and rocketed up, perhaps also aided by the view that it will benefit from Sandy's clean-up.
I want to go back to that screen but tighten it to see if we can come up with a more workable list. First, a 25% decline is nice, but let's go with 35%. This knocks it down from 311 to 176. Here's what else I want to do with Baseline:
- 5 Minimum Price (down to 100)
- $300mm Minimum Market Cap (down to 70)
- Net Debt to Capital < 40% (down to 50)
- Within 15% of 52-week low (down to 17)
- >4% above 52-week low (down to 13)
- Up >1% last week (down to 8)
Before I share the 8 that meet the criteria, let me summarize what we are doing here. In order to reduce the 176 stocks in the Russell 3000 that are down 35% or more in 2012, we set a minimum price of 5 and a $300mm minimum market cap. My thinking here is that these stocks might be more appealing to institutional investors for now. Second, we restricted how much debt they can have to prevent us from walking into some sort of liquidity issue. Then, we wanted to establish some price momentum. By keeping it to within 15% of the 52-week low, the train hasn't left the station. By requiring it to be up at least 4%, we are hopefully not dealing with "falling knives." Finally, by requiring that it be up more than 1% in the last week of November, we are making sure that someone else is going first. No reason to be a hero!
Here are the 8 that made the cut:
I sorted the list from worst to best. I guess no list of losers can avoid the for-profit education sector, and this one starts off with two: ITT Educational (ESI) and Apollo Group (APOL). When I did this exercise seven weeks ago, ESI made that list as well, but it was down "only" 46% YTD at the time. The stock has plunged subsequently, now down 68% YTD (and, if you do the math, down 59% from when I warned it was too early to bottom-fish). I am no expert in that sector, but, if these companies are viable they sure seem cheap. Of course, the earnings, as highlighted are in free-fall. When ESI reported Q3 in October, sales declined 13%, operating income plunged 36%, enrollment fell 17%, and DSO almost doubled to 26 days. Note that short-interest is spectacularly high. APOL saw an 11% decline due to lower enrollment at University of Phoenix in its fiscal Q4 reported on 10/16. Operating income fell by 72%, less on a per-share basis due to aggressive share repurchases. Whoops! They actually bought 19mm shares at 41.82 over the past year. While EPS estimates are falling fast for both ESI and APOL, both are expected to be profitable next in 2013. With very little CapEx, we don't have to worry about any sort of drains on liquidity.
I actually thought Hewlett-Packard (HPQ) was a great short-term buying opportunity last month when they disclosed their write-down of Autonomy. It's so easy to be skeptical, but I get the sense that Meg Whitman is likely to ultimately extract some value here, but it will take more time than an impatient Wall Street is willing to give. Reasonable people will disagree on this one - I am quite aware of some smart shorts in the name like Jim Chanos, who calls it a "value trap", but I wonder if they are overstaying their welcome. Chastising the Board for mistakes is easy sport. The question is: Can they move forward and take advantage of their assets? I have no special insight here, but this is one I think deserves some focus from seasonal bottom-fishers.
Best Buy (BBY), on the other hand, isn't one where I expect much. Absent going private, this one seems unlikely to attract Wall Street due to its glut of oversized boxes. After seeing tangible book value look like butter on a hot day for Radio Shack (RSH) on the way down, I take little comfort in the 1.8X TBV where BBY trades. Still, for a trade, it sure sets up nicely here. Risk 1.1 or so (to 12) to hit 14.50-16 perhaps (1.40-2.90 upside).
I don't really know Synchronoss Technology (SNCR) too well, but, unlike most of these stocks, it's not sitting near a 5-year low. The company is a mobile-play, providing software-based activation and mobile content management. They have a lot of exposure to AT&T (T) at 46% of Q3 sales. Unlike most of these stocks, the earnings estimates for 2013 have been pretty stable, and the company is still projected to grow sales (18%) and earnings (20%). Fellow author Ted Stamas, who is very focused on the space, has written on the name and shared his thoughts after they reported. He cited Sandy as a negative as well as pressure on the mobile technology sector in general. From a technical perspective, the recent pullback fell short of making a 52-week low and smells, so far, like a double bottom. Like I said, I don't really know this company, but it looks like a solid IPO from 2006 that is just shaking out some with big profits along the way. Note to self: Check this one out...
Acacia Research (ACTG) is a patent-licensing company. It too is trading well above its five-year low and is growing nicely. While analysts project that EPS growth will slow to just 6% in 2013, sales are expected to grow 30%, similar to 2012. I don't know this one either, but it's not surprising that a company like this would have lumpy sales and earnings. For example, in the most recent quarter, sales and other operating income declined rather substantially (from $63mm to $35mm), but are up 16% to $205mm on a trailing twelve-month basis. The company just announced a share-repurchase authorization of $100mm based on having $410mm in cash and investments and no debt after investing $214mm so far in new patents in 2012.
Systemax (SYX) is trading below tangible book value (perhaps slightly above after accounting for write-downs associated with the initiatives described below) and has almost $4 per share in cash net of a small amount of debt. The company sells technology (88%) and industrial (12%) products through e-commerce websites, retail stores and direct mail catalogs. Its brands include TigerDirect, MISCO, WStore and Global Industrial. 60% of its business is B2B and 40% Consumer. After Q3, it announced three initiatives, including consolidating its US activities under the TigerDirect brand, exiting the PC manufacturing business, and opening a shared services center in Eastern Europe next year. This one isn't widely followed at all (just 2 sell-side analysts) and might be worth looking at a bit more closely. Insiders own 71% of the company. Note that they just declared a 0.25 special dividend for holders of record on 12/12.
Qlogic (QLGC) was on that prior list as well, and it has fallen slightly. This old-school Technology company is quite oversold, as I mentioned last week when I discussed the most oversold Mid-Cap stocks. QLGC has one thing going for it: A huge wad of cash (almost $500mm). There may be a story here, but I sure don't know it.
So, hopefully this exercise and the discussion has allowed us to hone in on some potential opportunities among the battered and bruised. Looking at the well-known names, HPQ seems like a potential long-term contrarian entry, while BBY looks like just a potential trade. Among the others, ACTG, SNCR and SYX look worthy of further investigation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.