This is the time of year when many professional investors get their portfolios ready for the coming year. Often, they will hold on to winners to either look smart to their clients or to save on taxes but pare losers for the exact same reasons. At the same time, contrarians and opportunists like to look for underperformers that might have a better future. With that in mind, I decided to create a screen that would try to identify stocks that aren't having a good year and might be a bargain. Here is what I did:
- Russell 3000 member
- Minimum Market Cap of $500mm
- YTD Price < -2% (10% worse than the S&P 500)
- EPS growth >10% over the past year
- Sales growth > 0% over the past year
- Forward PE < 15X
- Net Debt to Capital < 20%
Here is what we ended up with (click to enlarge):
I sorted the list by sector and then by YTD price change. 8 of the 10 economic sectors are represented. I included two columns to characterize the earnings revision trends (and color-coded them) on the far right. I also highlighted 7 of the companies that are expected to see earnings fall next year.
The overall list has an average loss of 14% on the year. One big area of pain has been in the education stocks, with three of them down more than 30%. I am not so sure that the risks are fully priced in.
I find these types of screens interesting - you never know what will show up. You can see from the disclosure below that I have ample exposure to this list in my model portfolios. Beyond those names, though, here are a few that jump out:
I really don't know SF at all - it's a regional brokerage company. Financials are an area that has lagged this year, and I believe that this is a good area to hunt in general. SF has a nice chart short-term and long-term. It is expected to grow EPS by 31% next year.
ACM has faced a lot of headwinds with the slowdown in construction. The stock has never traded this low in terms of a forward PE. Again, a reasonable looking chart too. Like SF, the earnings estimates are stable to rising.
TECD is one I used to follow very closely. It is as cheap as it has ever been on several metrics, including PE at 10.7, EV/EBITDA at 5X and P/TB at 1.1X. This distributor has massive exposure to Europe - it's a good way to play the technology sector without betting on a particular horse.
Finally, HPQ is about to report. I believe that investors overreacted to the Hurd departure and the hiring of Apotheker. This stock appears to offer an excellent contrarian entry at a low PE and low EV/EBITDA. Like TECD, the chart looks constructive to me.
So, I think this is a good list to maybe find some mispriced stocks. I didn't detail the ones we already own in our models at Invest By Model, but most of these are names we have added recently (and all in 2010, with only CSCO trading below our average purchase price).
Disclosure: Long LOW, CHS, SKX, WAG, CALM, PLXS and CSCO in the Top 20 Model Portfolio and/or the Conservative Growth/Balanced Model Portfolio