It's the time of the year that we need to start talking about tax-loss selling candidates. Especially in a year like 2013, when the markets have had such a great run, followed by several years of strong performance, some losers will get sold off just to offset gains. This downward pressure from forced selling creates an opportunity to buy some of the "dogs of the market" at an even bigger discount. Let's get to our names for this most important year.
Hovnanian Enterprises (HOV) - Down 22% YTD
As I noted in my recent article, Top 12 Ideas for Your Portfolio in 2014, I think the first half of 2014 is shaping up to be good for the homebuilders. Interest rates beginning to rise combined with a better overall economy creates the environment for a strong spring selling season in 2014. The homebuilders have done a great job of managing inventories and holding new units offline in the back half of 2013, putting these companies in a position to take further pricing on new homes in 2014. Risks of higher rates scaring off buyers seem overblown as the 30-year rate is still under 5%. HOV has been the dog of the group, and rightfully so, but a good recent earnings report combined with positive momentum in the industry leads me to believe that this stock is a strong candidate for the list. Investors could reposition their portfolios away from HOV into other homebuilders in order to take losses, and then could re-enter their position in 2014 once the strong selling season materializes.
American Eagle (AEO) - Down 30% YTD
As I've noted before, I'm not a big fan of apparel retail going into the New Year, but the teen space has had a very weak 2013. Though the space will continue to be promotional in the short term, I see American Eagle as the name that will come out of this period in the best position. The company also offers a 3.5% dividend yield at its current levels. This is more a back-half of 2014 story. The stock is not only down 30% YTD, but is also still 25% lower than its highs in 2009. Since the holiday season and 1st half of 2014 are not looking too good right now, I expect investors to take losses and reassess a position during 2014. Abercrombie (ANF) is another candidate, as they have more operational leverage, but I prefer the AEO story.
LSB Industries (LXU) - Down 4% YTD
It's been a rough year for LSB Industries - two plants went offline due to an explosion and a pipe rupture, which led to capacity constraints that had an impact on operating results and forced the company to buy ammonia on the open market for 3x the cost of what the company can produce it for by itself. But, 2014 is shaping up to be the year that the company gets back on track and sees a positive runway in its business for the next several years.
The plants that were damaged are now back online, which will boost revenue in 2014 as compared to 2013. Both of the company's main businesses, climate control and chemicals, have seen recent growth. In chemicals (65% of revenue), management recently noted during their conference call that both UAM production and Cherokee Plant production for the balance of 2013 are sold out. What's more important, management thinks that they have already passed through in this business (from a combination of capacity falling offline and pricing), and now with the plant capacity coming back online after the repairs, we should see growth in the business going forward. In the climate control business, the company will benefit from a commercial spending rebound, and do over $300MM in revenue and over $1.50 per share in operating income in 2014.
Furthermore, the climate control segment as a standalone business would trade at a much higher multiple than the cyclical chemical business that drives LXU's company multiple. Management has noted several times in the past that there are not many synergies between the chemicals and climate control businesses, and that they could look to sell the climate control business at some point. When looking at comparable multiples for this business, it seems like a spin-off or sale of the unit could bring in north of $20 per share. This, combined with almost $5 per share of cash coming in from insurance proceeds, means that the company could receive cash proceeds that equal more than 75% of the company's market cap over the next 12 months.
I expect growth to kick in during the coming year for LXU, and for the company to beat current consensus estimates. Furthermore, once the expansion of the El Dorado plant is completed in 2015, and the company has 180,000 more tons of ammonia capacity than is currently online, the company will be able to save about $10MM in costs ($.50/share) associated to not having to purchase ammonia on the open market, and will be able to grow revenues by $90-$100MM (through selling excess capacity). Including conservative organic growth over the next two years, I get a full-year 2016 estimate of $5.50 per share (over 250% EPS growth from the depressed levels of 2013). I have a year-end 2014 price target of $40, but believe there is much bigger upside to the story longer term.
The stock has been trading in $30-$50 range the last couple of years, so I don't see much downside in an investment. 2014 is shaping up to be a much better year.
Annaly Capital Management (NLY) - Down 30% YTD
It's been a bad year for the mortgage REITs as investors have become increasingly concerned about the upcoming Fed tightening and its impact on spreads. But, I consider the management team at NLY to be best-in-class, and we have seen some big insider purchases recently:
This insider activity gets me interested in the stock. The stock has a current yield of 14% (which could change) and has had a very weak November and December.
Mosaic Co. (MOS) - Down 22% YTD
It's been a tough year for the Potash/Fertilizers companies because of concerns over pricing, but MOS has a large share repurchase program in place that makes the stock quite attractive. Since its spin-off from Cargill two years ago, the company was been unable to repurchase shares of its stock due to a restriction in the spin-off. The Cargill Family and Charitable Trust held shares of Class A stock, which was converted into common shares on November 26, 2013. In June, Mosaic engaged both the Cargill Family and Charitable Trust in hopes of accelerating their ability to complete share buybacks (even before the sell-off in the stock). Unfortunately, the Cargill Family and Charitable Trust declined Mosaic's request. Mosaic issued a statement in June stating that it would continue its plan to begin share repurchases once the restriction was lifted in November.
Mosaic now has the ability to repurchase shares, and recently announced that it will repurchase 43.3MM shares from the Cargill Family and Charitable Trust (10% of the float). I think that the company has the ability in the future to repurchase even more stock. This fact, combined with The Economist's view that pricing will be favorable next year leads me to believe that 2014 could be a much better year for the company.
iPass Inc. (IPAS) - Down 9% YTD
iPass is a name that plays on my idea that increased mobile/tablet data usage will be a big theme for 2014. Smartphones and tablets are now commonplace, but because of the rollout of 4G, we are in the early stages of a shift in the way we use these devices. Digital content (music/videos/work-related usage) will only increase now that we have better bandwidth available. 4G will continue to be rolled out through the United States during 2014. The problem is, as our usage of data on these devices increases, it will put a heavier burden on the network. Furthermore, data plans are becoming costly now that unlimited data is not an option on most networks (something Europe is beginning to regulate). Companies that help users stay connected should be popular during the coming year.
iPass provides a global network of Wi-Fi connectivity. The company licenses out Wi-Fi hotspots in order to provide the biggest network available. The big business is monthly contracts with large companies. These companies pay per employee to provide global access to these Wi-Fi hotspots instead of relying on roaming and data usage (especially internationally). The company also provides the network for companies like Gogo (GOGO) so that users can rent Wi-Fi access (think airplanes). The company has $25MM of cash on the balance sheet (25% of market cap) and no debt. When looking at the financials, revenue has declined each of the last 4 years, but that's attributable to the run-off of the legacy dial-up business. The company is now growing Wi-Fi revenues fast enough to offset these slowing declines in dial-up, so we should see revenue growth fairly soon. I think a big piece of the recent sell-off had to do with tax loss selling, so this provides investors an opportunity to initiate a position at a cheap price.
Vitamin Shoppe (VSI) - Down 10% YTD
The Vitamin Shoppe has had a very weak year due to several factors:
- Weak Comp Results
- Amazon (AMZN) entering the supplement market, with a focus on VSI's core customer (baby boomers)
- Increased competition from GNC (GNC)
I would argue that each of these concerns is overdone. Though Amazon is entering the market, VSI controls only 3% market share in the space and the industry will grow faster than the overall retail industry for the foreseeable future, so there is room for so many competitors to succeed. GNC's Gold Card program has made no impact on VSI's business to date. Weak comps results for 2013 are more of a function of above-average growth the last several years, and will become a tailwind for the company in 2014, as the company should beat a low bar on estimated revenues. Not only should the vitamin/supplement category grow faster than the retail industry over the next couple of years, VSI has the opportunity to grow stores 8-10% annually. The company will have 660 stores by year-end, but already has plans for at least 900 stores.
The stock has had a nice run since my last article, but I still believe there is room to go. I have a $55 price target on the stock.
Nuance Communications (NUAN) - Down 35% YTD
The provider of voice and language solutions for businesses and consumers globally has had a very tough 2013, but 2014 could be a much better year. NUAN is continuing to see revenue pressure from demand for ratable pricing models, but bookings for 2014 look strong. Additionally, we cannot overlook the purchases by investor Carl Icahn:
Mr. Icahn is one of the most successful investors out there, and he wouldn't be putting his money in something he didn't believe had significant upside. He has been aggressively buying around the $14 price level.
Quest Diagnostics (DGX) - Down 10% YTD
DGX has had a rough year due to the overall level of negative news which has hit the laboratory names (US government is cutting reimbursement rates for 2014, which is now well known). But, the company will benefit from several items in 2014 including:
- The implementation of Obamacare (at some point) which will provide a larger pool of insured people
- Increased employment, which translates into more people on health insurance and more drug testing for new employees
- A new management team, which has been implementing major cost initiatives and streamlining their businesses. DGX was really a roll up of numerous different clinical labs, all with their own ERP systems and sales force. The new management team is restructuring the company and bringing financial discipline to their numerous divisions.
- The company has been selling non-core assets and buying back stock, and this should continue in 2014
- The company could be a big beneficiary of the growth in genetic testing
I think that there are too many industry and company-specific catalysts to ignore the story. 2014 will be a year where we watch reimbursement rates, but if these risks end up being overblown, the year could shape up very nicely for DGX.
Encana Corporation (ECA) - Down 9% YTD
After disappointing results over the past couple of years for Encana, CEO Randall Eresman retired from the company this year. In June, Doug Suttles was appointed as his successor. Mr. Suttles is a veteran of the oil and gas industry. Prior to coming to Encana, he was the COO of BP Exploration & Production (BP). Upon becoming ECO, Mr. Suttles laid out a new strategic plan:
"1. Resource Identification - It is critical to have world class skills in this area and focus efforts on the highest quality plays and leverage Encana's operating skills.
2. Market Fundamentals - Encana expects that future oil and natural gas prices remain volatile. Understanding hydrocarbon type differentiation and regional factors will become increasingly important. This knowledge must be strongly linked to portfolio decisions and capital allocation.
3. Capital Allocation - Capital decision making must be centralized, focused, completely aligned with strategy and driven by returns.
4. Operational Excellence - The company's internal and external assessments demonstrated that the difference in capital and operating efficiency between the top performers and the industry average in core plays with scale can be twenty percent or greater and that Encana has consistently performed amongst the best competitors in these areas. Leveraging the company's development expertise will be crucial to achieving higher returns.
In addition, maintaining a strong balance sheet will be critical to consistent delivery of strong financial performance and to support the company's ability to capture new opportunities."
A month after the CEO appointment, it was announced that David O'Brien would step down as Chairman of the Board, and would be replaced by Clayton Woitas. Overall, management changes can be catalysts for a turnaround. ECA, considering the sell-off this year, is a name investors should consider.
Gold (Down 30% YTD) and Silver (Down 37% YTD)
It's been a pretty rough year for Gold (GLD) and Silver (SLV) as pricing has dropped dramatically. Miners increase capacity when prices are rising, but will not rationalize in the new environment. This should lower demand, which will help on the pricing end. I'm not going to be buying right now, but I will be monitoring. I think the best way to play this is with large miners, like Newmont Mining (NEM) or Silver Wheaton (SLW), or with ETFs (GLD, GDX, SLV) in order to reduce the operational risk of any one company.
The "Dogs of the Market" sometimes end up being the biggest winners the following year, and I think the names on this list have an opportunity to be successful in 2014. I suggest that investors review these names to see if all or some of them are a fit for their portfolios.