Investors that get caught up in the latest media driven fear mongering have missed out on some of the greatest moves possibly ever. Look at the list of some of these beaten down stocks since 2009:
Pier 1 Imports (PIR): up 217 fold from $0.10 to $21.7
Select Comfort (SCSS): up 108 fold from $0.19 to $20.55 (was up 187 fold in early 2012)
Sirius XM Radio (SIRI): up 61 fold from $0.05 to $3.05
Las Vegas Sands (LVS): up 36 fold from $1.38 to $50
Lululemon Athletica (LULU): up 30 fold from $2.17 to $65.86
There are hundreds of other examples to show the returns over the past 4 years. That's fine and dandy, but what good does that do us investors today? Well, in my opinion, it shows you how well you can do if you pick the correct stocks in a bull market, which I contend we are in the midst of a Secular Bull Market. Everyone has their own definition of what a secular bull market is, but it's my belief that we will see new all-time highs and hit 1,700+ on the S&P 500 within the next 12 to 18 months. I do see the market having a sizeable drawdown to the 1,350 level, but I think we're still going to see new all-time highs that are a good deal higher than the prior highs and that to me constitutes a new secular bull market.
In a bull market, I think investors should always be focused on potential opportunities for outsized returns from individual securities. Since March 2009, the stocks that have outperformed the most are the ones that were the most beaten down. This has been true after every pullback as well. Consider the following stocks after the fall 2011 correction:
Standard Pacific (SPF): up almost 4 fold from $2.20 to $8.
Headwaters (HW): up 9 fold from $1.05 to $9.19
Builders FirstSource (BLDR): up 5 fold from $1.01 to $5.83
DXP Enterprises (DXPE): up 3.3 fold from $17 to $56.30
Nautilus (NLS): up 4.3 fold from $1.35 to $5.77.
Again, there are dozens of examples just like this. Look at the rebounds in stocks like the following since the summer of 2012: Nokia (NOK) up over 100%, BlackBerry (BBRY) up over 100%, WFR up 3 fold, Caesar's (CZR) up 3 fold in past 3 months.
What Will Work in 2013/2014:
If my theory is correct that we will see substantial new highs within the next 12 to 18 months, I want to continue to recommend investing in stocks that are beaten down, but that will benefit from a continued rebound in the US economy and a potential rebound in the European and Japanese economies. I prefer companies that have any or all of the following:
(1) Defined catalysts that will propel them higher. Examples include:
a. Sony (SNE) is up off a weakening yen that will greatly help exports, as I wrote about in my prior article 7 weeks ago. The recent fall in the Yen is offering up a huge boost for the export-dependent economy. Prices of goods coming out of Japan are falling significantly enough to now have an impact on domestic exporters. A weaker Yen enables Japan's exporters to gain market share or to boost margins. "A significant chunk of Japanese companies' overall profits also comes from its foreign operations - if the Yen weakens, overseas profits are worth more in Japanese currency," said Capital Economics markets analyst John Higgins.
b. Boyd Gaming (BYD) holds gambling licenses in NJ, which is poised to legalize online gambling imminently. Boyd owns a 50% stake in the Borgata in Atlantic City. The Borgata features 2,000 guest rooms, 182 tables and 3,475 slot machines. It also has 12 restaurants, a huge spa, 4 nightclubs, and a 70,000 square foot event venue. It is an enormous property. At 4 times free cash flow and 0.40 times book, I think far more negatives than positives are baked into the share price.
c. Travelzoo (TZOO) is launching a hotel booking platform in the 2nd half of 2013 that will help them monetize their traffic better than they have in the past. In terms of valuation, the company trades at a huge discount to their peers: a P/E of 15 vs an industry wide average of 25, a price to free cash flow of 12 vs an industry wide average of 22, and a price to sales average of 2 vs an industry wide average of 4. Included in their industry are KYAK, TripAdvisor (TRIP), Priceline (PCLN), OWW, and EXPE.
The company in its most recent quarter reported some very impressive growth figures in mobile: One-third of all traffic now comes from mobile. Mobile app downloads increased 427% year on year and Facebook (FB) fans increased 274%. The company began adding additional photos to top 20 deals and added Facebook feedback on each deal that increases the stickiness of deals and sell through rates on vouchers. Sell through rates increased 12% and click through rates increased 14% as a result of these changes.
What is also impressive is that they were able to grow revenues in Europe 10% in a period of significant weakness in Europe and they grew their revenues on hotel getaway deals by 50%, resulting in $1.3 million sequential growth in their "travel" segment. This is at a time when there was no hotel booking platform in place.
(2) Operational turnaround stories. Examples include:
a. YRC Worldwide (YRCW) has turned annual operating income around from over -$800 million to +$25 million in the past 3 years and their momentum appears to be gaining steam. YRCW managed to post an operating profit of $21.1 million in Q4 2012, only slightly worse than the $25 million posted in the seasonally strong Q3 (both of which I have adjusted for one-time items). YRCW owns 3 regional trucking businesses that they consolidate as their regional division and a national less than truckload or LTL division known as YRC Freight. YRC Freight was the main driver for these numbers, generating a $18.3 million increase in operating income over the prior quarter and a $48 million increase year on year.
b. Vonage (VG) has turned around its net equity from -$130 million to over $300 million in just the past 3 years. It trades at 7 times free cash flow and 0.7 times sales, while its main competitor, 8x8 (EGHT), trades at 70 times free cash flow and 4 times sales. Vonage is not growing nearly as fast as EGHT but it does have a significant potential to grow in Brazil, where it recently partnered with Datora Telecom to deliver communication services to customers in Brazil.
(3) Net Asset plays - companies where the sum of their parts is greater than the whole. Examples include:
a. Nokia - Between royalties on a huge patent portfolio, net cash on hand, and a very valuable Nokia Siemens Network division, the sum of Nokia's assets is at least 50% higher than the current market cap. Nokia Siemens Network is fast emerging as the leader in the ongoing LTE transition around the world. Q4 results in this division were very impressive: all time high non-IFRS operating margin of 14.4%, net sales of $5.3 billion, 14% higher than Q3 2012. In addition NSN reported they are now targeting even more than the $1.3 billion in cost reductions by the end of 2013. On a standalone basis this division could generate greater than $2.7 billion in profits. Think about that for a second when comparing it to the entire company's market cap of $14 billion.
b. Sony's entertainment division alone is worth approximately $6 per share if you compare its market share with that of Lions Gate (LGF).
c. Boyd Gaming's net asset value is worth more than double its current market cap and as one of a dozen or so companies that hold gambling licenses in the state of New Jersey, which is about to become the 3rd state to offer online gambling. Its assets could potentially become the subject of a bidding war.
My point is these types of returns do not come from investing in bonds (TLT) or gold (GLD) or any other asset class. You will not get wealthy enough to retire off anything other than equities when it comes to investing in financial markets. Risks are always greater but if you are patient and are willing to invest when fear is heightened, you will be rewarded. When fear reigns the airwaves you would be wise to look for opportunities just like the ones I listed above.