While 2012 has been friendly for stocks (much friendlier than it feels, as the S&P 500 is up in price by 12.4% and the Russell 2000 by 11.2%), it hasn't been a great year for all stocks. This is the time of year when many investors like to sift through the poorly performing stocks of the year, anticipating that there might be some bargains due to tax-loss related selling as well as window-dressing.
Most readers probably understand the dynamic of selling to book losses, but let me make sure that I am clear about this possibly more powerful second factor. Many institutions are embarrassed to show their mistakes, so they prune their portfolios of losers and hang onto winners for year-end. Both of these behaviors pressure losing stocks, but smart investors have figured this out over the years, with many employing a strategy to scoop up bargains in December (like Christmas sales).
I have shared a few screens designed to hone in on this type of activity, most recently discussing eight beaten-up stocks starting to bounce earlier this month. Several of those stocks have continued to bounce. Today, though, I want to see if some of the walking wounded that aren't yet participating in any sort of bounce yet may be of appeal. With this in mind, I ran the following screen using Baseline on all stocks in the Russell 3000 with market caps in excess of $500mm:
- Down YTD by > 25%
- Down QTD by > 10%
- Down in December, but not by more than 4%
The point was to find some stocks that are really hammered and not yet bouncing. I restricted the December loss because I didn't want to walk into fresh weakness. Here are the 13 stocks of companies who probably think that the year can't end soon enough:
I sorted the stocks from worst to least horrible. I also included a lot of additional information, including net debt to capital, PE ratios, a 3-year price return (several stocks are still in the rally mode despite the bad year), price-to-tangible book value and dividend yields. Let's take each one in order.
Swift Energy (SFY) is one of several Energy stocks on the list, all of which have suffered as natural gas prices have eroded. So far this year, the company has spent a stunning $576mm in Capital Expenditures through the first three quarters, a number that is over 3X D&A and ahead of 2011's total of $505mm. The company has suggested that 2013 spending will drop sharply from the $700mm that it roughly projects for 2012. CEO Terry Swift owns about 1.3% of the company, with total insider ownership of 4.4% (per proxy). He is following a common strategy of focusing on crude oil and natural gas liquids and is forecasting double-digit production and reserve growth for 2012.
Allscripts (MDRX) has had C-Suite controversy, with a late-April bombshell with the CFO as well as the Chairman and several other directors leaving, as the company slashed its 2012 outlook. The stock took off in late September on buyout rumors but has now returned to where it was trading before the speculation. In the Q3 press release, CEO Tullman pointed to continued interest from third parties (Citigroup is advising the company), but he also then pulled the guidance for the year. MDRX offers Electronic Health Record, practice management and other information solutions to doctors and hospitals.
Marvell (MRVL) is one of the world's largest semiconductor companies focused on storage, communications and consumer applications. The company invests heavily in R&D. The dividend is relatively new, and the company is an aggressive share repurchaser. This one seems very inexpensive to me. The husband and wife founders (he is the CEO and Chairman) and the CEO's brother, who serves as CTO, own 19% of the company. The company has relatively low capital spending requirements, with CapEx well below D&A. This one strikes me as very cheap, but I thought the same two or three points ago too.
iRobot (IRBT) is one I know fairly well, as it is on my watchlist of 100 stocks. I have been tempted because I think that this is a long-term winner in the robotics space. Its business has changed a lot this year, moving from about 50/50 defense relative to consumer to something like 80% consumer. You are probably familiar with the consumer business - this is primarily the Roomba vacuum cleaner. The company has done phenomenally well here and is likely to continue to grow due to expansion in China and Brazil. There are other products too, and the company just added to its IP with an acquisition. Defense, though, has been a disaster. The good news is that I don't think it can get much worse, and the company seems to be guiding now very conservatively. The cash on the balance sheet is less than it appears, as the acquisition of Evolution Robotics for $75mm closed on 10/1. Still, the company has almost $4 per share in cash.
R.R. Donnelley (RRD) is the company that screwed up the Google (GOOG) SEC filing in October. It has continued to fall since then, though I am not sure that it is at all related. More likely it brought attention to the fact that the company offers the ugly combo of shrinking business with lots of debt. It looks like no one believes in the likelihood of the dividend being maintained. The company has paid that same $0.26 per quarter since 2004, and it now represents over 1/2 the projected EPS. The company has substantial CapEx requirements. Even taking that into account, though, the free cash flow is more than adequate to cover the dividend for now. After Q3, the CEO suggested that the company would be cutting costs in 2013.
Universal American (UAM) is one that looked like it was hammered in 2011, but it paid out a one-time distribution to owners. The 2012 weakness is real, except that the company did pay a $1 special dividend last month. So, it's only technically limping after adjusting for that payment. This company, which is focused on Medicare and Medicaid health insurance, seems awfully cheap. Note, though, that the 0.8X P/TB is understated, as it doesn't reflect the cash dividend. Still, the stock is trading at only a slight premium, and the 12 PE is in line with the 10-year median.
Ultra Petroleum (UPL) has suffered due to weak gas prices and substantive debt. The balance sheet has eroded significantly due to write-downs this year - over $2.2 billion in two quarters as the net fixed assets have declined by almost 50%. After Q3, the company indicated that it will continue to generate free cash flow while gas prices remain low by chopping CapEx aggressively. The company initially had guided for $925mm spending in 2012 but now anticipates $800mm. Rockies production accounted for about 72% and Appalachian accounted for 28%, with production for the year likely to rise by 2-6%.
Exelon (EXC) is the worst large-cap Utility this year by far. The company is being hurt by low natural gas prices, which are hurting power prices for its nuclear-oriented fleet. This company, which combined Exelon with Constellation in a deal that closed in Q1, consists of several different utilities, including ComEd (Illinois), BGE (Maryland), and PECO (Pennsylvania), which provide electricity and gas to 6.6mm customers, and Constellation, which services 100K business and public sector customers and 1mm residential customers. I am no expert here, but it seems like there is no reason to jump into the worst stock in a bad sector. I have written previously regarding my Utility strategy - focus on growth to offset what will likely be pressure from rising interest rates.
Contango (MCF) is an interesting situation. I shared my negative view this summer when the CEO became so ill that an interim CEO was named. Since then, the company named a different CEO on a permanent basis, but it also drilled two dry holes. Still, the stock has dropped 1/3 of its value since then. This is a very unique gas-focused E&P company that outsources almost everything. It just paid a special dividend, so its inclusion on this list actually should be denoted with an asterisk, as the $2 added back would leave the stock up slightly in December. With a strong balance sheet that is debt-free and a valuation now that is seemingly attractive (on an asset basis), this one looks like a classic year-end bargain.
Abiomed (ABMD), which makes mechanical circulatory devices and has a very impressive growth profile, ran into trouble in Q4 after the company disclosed an FDA issue. I don't really follow this company or really have a lot of insight regarding the issue. The FDA made a ruling in early December and the company held a conference call last week. The product in question will apparently remain on the market for now, while the company submits a PMA. The Impella originally entered the market in 2008 with what is known as a 510(k) and generates the bulk of sales. Sounds like a huge risk of a future problem that won't be resolved for years.
EZCORP (EZPW) is one I know well too, unfortunately, as it has been in my Top 20 model portfolio most of this year. We did exit for a while and repurchased recently, but it has been brutal. The company has seen a lot of management turnover as it has been pursuing a more global strategy, expanding in Mexico, Canada and beyond. It has been difficult to fully understand what is going on, but the company's line has been that the profitability of gold operations has hurt the pawn business domestically. I find the stock very inexpensive compared to its peers and outright. While it used to have significant exposure to the politically challenged payday lending, that is no longer the case. Note that the company carries two large investments in affiliates substantially below the market prices of these publicly-traded companies (A&B, Cash Converters).
I used to follow BJ's Restaurants (BJRI) closely, but I gave up when it got too expensive (peaked at almost 50PE on a forward basis). You can search for it, but I snuck in my favorite title on Seeking Alpha on the name in August 2008, when the stock was just $12. While it traded as low as $6.63 that fall (boy was that crazy), it then marched to almost $57 fewer than three years later. Since then, it has been quite weak as growth has slowed just modestly. I think that the story remains bright, though perhaps there are some questions as the CEO role transitions to Gregory Trojan (effective in February). Sales are supposed to grow 14% in 2012 and 15% next year, with 20% EPS growth in 2013. 25PE isn't cheap, but it's not outrageous. I think that a lot of this recent weakness is due to the fact that there are still lots of long-term capital gains embedded. Still, with so many other interesting choices in the space, this one doesn't really appeal to me right now. I just wrote about Ignite Restaurant Group (IRG), which I find to be more compelling, and I also have owned Red Robin (RRGB) in my Top 20 model portfolio since July.
Last up is Chesapeake Energy (CHK), which is our final stock stuck in the gas chamber. This company has been aggressively shedding assets this year. I don't have a strong opinion on the company, though I don't care for the CEO's leadership at all, and I will leave it at that.
So, this has been a cursory look at some of the year's worst performing stocks. As always, these aren't recommendations (though I put my stamp of approval on EZPW), but hopefully my comments get you started in your own investigation. I know that I will continue to watch IRBT closely, and a few others look interesting to me as well. Happy hunting!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Long EZPW in one or more model portfolios managed by the author at Invest By Model