15 Stocks That Are Having a Tough Quarter, But Are Still Worth a Look

The S&P 500 moved into the green in May and has never looked back. So far in Q3, it's up a whopping 16.8%, even better than Q2's 15.9% total return. Despite the large advance, 40 of the members are actually down QTD. Thinking that there might be some opportunities from the long side, I wanted to take a closer look, so I created a screen in StockVal to narrow the list. Here is how I constrained the group:

• 50dma > 200dma (maximum 10%)
• PE F12M <120% of 5yr Median
• Net Debt to Capital < 60%

The first constraint is to assure that the trend is up but it isn't overextended. The second constraint makes sure the PE isn't super-inflated. The final factor kicks out balance-sheet disasters. Here are the 15 stocks:

Note that several different sectors are included (7 out of 10). As a group, these stocks are certainly lagging the market this year, but they did better last year for the most part. The group also has a lower PE than the market in general. I also included a measure of earnings revisions. In general, the group isn't seeing large negative revisions that are driving the price declines, as the median is about unchanged.

Running through the list, I do have a few observations. The lone Industrial stock, Stericycle (SRCL), is certainly a defensive stock. The lone Consumer Discretionary stock, Family Dollar (FDO), has pulled back recently after being up strongly in 2008. This stock looks very inexpensive to me - I recently added it to the Conservative Growth/Balanced model portfolio.

There are several Healthcare stocks on the list. LabCorp (LH) and Quest Diagnostics (DGX) are down a bit this year after being down just slightly last year, with investors somewhat concerned about reimbursement. Gilead (GILD) was up last year, but it has retreated this year and is at the lowest PE in quite some time. St. Jude (STJ), which has been at 38 for six years, is on my watchlist. It sure seems inexpensive. I recently added Becton Dickinson (BDX) to the Conservative Growth/Balanced model portfolio too. Analysts were caught off guard when the company indicated that 2010 EPS wouldn't benefit from the currency hedging that helped boost 2009. I like the broad product portfolio and the high international exposure.

I don't really have too much to say about the two Finance names that made the list. Electronic Arts (ERTS) seems rather inexpensive considering its large cash hoard and its decade-low PE. Akamai (AKAM) is one that I own both in a portfolio I manage as well as my Top 20 model portfolio (up 54% YTD). Verizon (VZ) made the cut, but I am suspicous. Finally, there are three Utilities that probably merit a look.

Many of these stocks are defensive and have given up some ground as investors have become a bit bolder. It probably makes sense to take a closer look at these names, as they could play catch-up if the market continues its strong bid or come back into favor if it pauses or retrenches.

Disclosure: Long AKAM in a portfolio I manage

Comments

[Ricard:]

Alan,

Thanks as always for providing a fresh look at the stock market.

Not sure if we're seeing the same company in ERTS...everything I've been able to find on the company indicates that it's a dog with a massive flea problem. I can see how PE may be low if averaged over 5-10 years but...not sure what it would take to pull it out of its current malaise.

Sep 20 03:13 PM

[cross:]

I very much like FDO at this price and at this time. It is retail, counter-cylical, trading slightly above 30 at the March lows and now below 27. They raise their dividend in January, a further support to the price. They are having a great year with earnings up 35% in the last quarter (year over year).
How to play it? Sell the April 25's Puts. You can get about $2.40 for them now so one would effectively be buying the stock at $22.60 should exercise occur. That is @ 12 times TTM, a bargain IMO.

Sep 20 04:16 PM

[Alan Brochs...:]

Thanks, Ricard. I haven't really looked that closely at ERTS (hence "seems"). The earnings estimates have clearly dived this year. If they are anywhere near close for 3/2012 (1.46), the stock, net of its $1.5 billion in cash less deferred revenue, trades at less than 10X. It also trades at 3X tangible book value. I need to find out about these fleas!


On Sep 20 03:13 PM Ricard wrote:

> Alan,
>
> Thanks as always for providing a fresh look at the stock market.
>
>
> Not sure if we're seeing the same company in ERTS...everything I've
> been able to find on the company indicates that it's a dog with a
> massive flea problem. I can see how PE may be low if averaged over
> 5-10 years but...not sure what it would take to pull it out of its
> current malaise.

Sep 20 06:22 PM

[ArtfulDodger:]

AB, thanks for the run down on these stocks. I think you're better at finding investable stocks than predicting market direction, as all of us are. Ha.

At a quick glance I still don't see anything that I would take profits in my Chinese, Brazil, or the few American stocks I have to buy. Nor do I see anything that would make me use my current cash on hand. And that's across the board---not just the stocks you've pointed out.

Those healthcare stocks do look interesting and some oil/gas drillers (NE, e.g.) look buyable. But you have to wait on them to come back with no dividend. Not too appealing for me at this time.

Are you still hanging in there with your S&P crash prediction?

Sep 21 11:08 AM

[Alan Brochs...:]

I don't think I had a "crash" prediction - more of a retracement prediction and concern about worse. It's been very tough not being superbullish in the best bull market of my life. The account I manage is benched against 60% stocks and 40% bonds, and it is up 27.5% YTD as of tonight. That's a lot better than the benchmark and somewhat better than the S&P 500. I have been too conservative there, running high cash balances and investing in Consumer Staples. Even a monkey can make money in this market!

Sep 21 05:35 PM

[Ricard:]

I don't have too much really...ERTS was a tertiary interest for me a while back. What I thought was interesting was that it was supposed to be the 800 pound gorilla in this space, but unfortunately that has not played out over time.

The main problem is that it lacks a franchise. It tried to buy take two to get GTA, but failed. ATVI has Blizzard's long track record, Nintendo has characters spanning 20+ years - ERTS has sports, the licensing of which can go either way, and is not proprietary.

But perhaps you're right - I thought the out-sized losses were unique to ERTS, but that does not seem to play out. I'm just not sure if top-line would recover as much as other names in the sector once cyclicality is factored in. I do see how you can come to the conclusion that ERTS is a better value play than, say, ATVI.

Of course, this is certainly an extremely fickle sector. I suppose anything really can happen with virtual goods.

Sep 22 09:07 AM

[bobbybutte:]

The author is very intelligent and as a dividend investor likes his article

Sep 23 09:00 PM

[User 500775:]

I noticed that ( finally) SRCL made a significant move today. Volume was nearly double average daily volume. I was unable to find any news re Stock. I am aware that they will announce earnings October 27th. What I fail to understand this company has remained profitable during these challenging economic times and the stock for the most part has remained much closer to it's 12 month low than seems appropriate. If anyone has any thoughts were this stock is going between not and end of month I would be interested in their thoughts and the basis for their conclusion.
Thanks

Oct 15 10:55 PM