As good as 2013 was, 2014 has gotten off to a horrible start for stock investors. Through Tuesday, the S&P 500 was down 5% for the year.
Unfortunately for Magic Formula® investors, several of the screen's stocks have been pummeled early this year. I count at least 8 stocks down 20% or more so far in 2014, and an additional 4 that are down over 15%.
Remember, these were already quantitatively "cheap" stocks, so an additional 20% or more decline could set up a very enticing valuation for value investors. But we need to figure out if these dramatic declines are warranted by the facts, or driven more by irrational fear and panic.
Let's take a look at the 5 MFI stocks that have fallen 25% or more this year and quickly review the circumstances surrounding them.
United Online (UNTD) - down 27.5%
Much of United Online's appeal was due to its over 4% dividend yield, but the company announced in late January that it would be discontinuing its dividend to focus on growth initiatives. This follows its November spin-off of FTD, which leaves United with 3 cash producing but declining businesses: Classmates.com, NetZero, and Juno. NetZero Mobile Broadband is an interesting product but one with a lot of competition from the carriers. Frankly, the dividend has been the main attraction for some time, and without it this is a declining company with a fair bit of debt. That does not make for the most attractive option. PASS.
Performant Financial (PFMT) - down 28.1%
Performant earns fees for collecting delinquent student loans (about 60% of the business) and providing recovery services for improper Medicare payments (close to 30%). The recent sell-off in the stock seems due to comments from Sallie Mae regarding lower rehabilitation fees paid to Guarantee Agencies, which investors expect to "trickle down" to service providers like PFMT. The stock has been sold off dramatically on these assumptions. We should know more when the company reports earnings in the coming weeks, but this is one worth looking at more closely - the firm has been growing revenue at 30%+ rates. WORTHY OF CONSIDERATION.
GameStop (GME) - down 31.1%
Short sellers have been mouthing off about GameStop since at least 2008, and all the stock did was go up - all the way to a high of over $55 back in October. So forgive me if I'm not sold on digital distribution and smartphone gaming "killing" the company just yet! There were 2 catalysts for the recent drop. One, the stock was probably overvalued in the $50's, considering its less-than-stellar growth prospects. Two, the firm reported a 22.5% drop in new software sales during the holidays. That's not great, but console transitions have historically caused disruptions in software sales. In the meantime, GameStop continues to buy back large amounts of shares and the dividend yield is now over 3%. WORTHY OF CONSIDERATION.
We've written about Neustar recently, with a positive opinion of the company. However, I also commented that the number portability contract renewal was a key risk. That risk looks even more acute considering the firm's comments about a second proposal being rejected by NAPM. It is rather mind-boggling that management would goof on such an important piece of business - it is well over half of the company's revenue. But a Neustar without that contract is an entirely different company altogether, and the risks are too large now. PASS.
Nu Skin (NUS) - down 43.1%
The Magic Formula's biggest winner of 2013 has so far been its biggest loser of 2014. There are few groups of stocks more manipulated and volatile than the multi-level marketing firms, and this year's fear is China cracking down on the MLM business model. The People's Daily paper in China accused Nu Skin of being an illegal pyramid scheme in January, which was followed by the announcement of a government probe. This is quite important as China now represents half of the company's revenue, and grew 4-fold in the most recent quarter! Frankly, I'm less focused on the probe than the valuation ... Nu Skin isn't really that cheap anyway, even after a 40% drop! PASS.
Disclosure: I am long PFMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.