This is always one of the most exciting times of the year for me professionally. Earnings season has come and gone, and things are winding down for the year. Investment performance is measured in days, weeks, months and quarters, but it's the annual number that counts the most, and many have their eye on the "finish line". For me, investing is a continuous process, but there is something about the turn of the calendar.
Tax-loss selling makes sense all the time rather than just at year-end, but people often wait until the end of the year to address it. Another great aspect of Q4 is the window-dressing effect (throughout the quarter since many mutual funds have an October fiscal year), where mutual funds and separate account managers pare their portfolios of underperformers so that they don't look bad to their clients. At the same time as all of these factors lead to some serious pressure on poor performers, many market participants are beginning to lock down. They come back from the holidays and then take risk up or look for new positions. This behavior is repeated every year and offers an opportunity to individuals or institutions that don't care if they show dogs at year-end and is the underlying cause of the "January Effect".
So, while most everyone is getting ready to hit the holiday party circuit, take some time off or start to work on their annual letters to their clients, I suggest that one's time can be very well spent sifting through the rubble of 2010. With that in mind, I designed the following screen:
- Market Cap > $100mm
- Down > 25% in 2010
- P/TB < 1
- Net Debt to Capital < 25%
- Assets/Equity < 3X
- Projected 2011 Loss < 10% of Market Cap
The goal, then, is to find companies that are down a lot but that have decent balance sheets. Here is what we came up with (click to enlarge):
Not surprisingly, all of the names that met the criteria are rather small. What did surprise me, though, was that 8 of the 10 economic sectors are represented (no Technology or Telecommunication Services). While I was familiar with all of these companies by name, none of them are on my Watchlist (which I just updated Friday). What follows is my quick look, in order, to see if I can describe what went wrong and hopefully assess the likelihood of better times in 2011 or 2012.
Christopher & Bank (CBK), the Minnesota-based women's retailer, has declined by more than 50% since April but still sits atop its late 2008/early 2009 trading range. The company just pre-announced a very nasty quarter (ending 11/30), expecting same-store-sales to decline up to 10% and to generate a loss. Last month, the CEO resigned and was replaced on an interim basis by the Chairman of the Board. The Chief Merchandising Officer left too, while the CFO left during the summer. This one looks like it merits further attention, though I am very happy with rival of sorts, Chico's (CHS) which is in both my Top 20 Model Portfolio as well as the Conservative Growth/Balanced Model Portfolio.
Winn-Dixie (WINN) has a more disturbing chart, having recently put in a new low since it began trading in 2006 (out of bankruptcy). The grocer, which has been suffering as it lowers prices to be more competitive and was also hurt by the BP spill, looks to be very challenged.
Willbros Group (WG), the energy engineering, procurement and construction company, has pulled back to the top of its late 2008/early 2009 trading range. Famous Value investor Jeffrey Gendell owns a lot of this one and was adding in Q3. I put together this list without reviewing the companies, and it's pretty clear that it no longer meets the criteria due to a massive acquisition completed at the beginning of Q3 and not reflected in the data used in my screener. Not that this is bad necessarily, but it highlights the potential risk (or opportunity) of investing in companies with excess capital. Hopefully, this deal works, but they have loaded up the balance sheet to do it. In fact, they used their capital to buy a bigger entity than their historic business, tripling their total liabilities.
FBR Capital Markets (FBCM) is a perennial value stock. Historically, it was burdened by a mortgage portfolio, but it is now solely an investment bank, broker, asset manager and merchant bank. Business was down in the most recent quarter from a year ago, and the company has chopped about 15% of its headcount. The company has been pretty aggressive repurchasing stock in the first half of the year - 2.8mm shares at an average price of 5.16. Whoops! The stock bounced nicely off of the 3 level, which had last been seen in early 2009, but this one looks rather complex to me.
Albany Molecular (AMRI) is an outsourced drug discovery company. It may be completing a double-bottom at the lowest level since its 1999 IPO. This company has been dogged with bad news throughout its history, and it recently announced a loss of a lawsuit as well as an FDA warning letter about its facility that it just purchased in Vermont. The company, which gets substantial royalties from the Allegra franchise, has been making acquisitions in the manufacturing services area. This company has been a huge disappointment to every single investor in its almost 12-year history. The price may finally be right, but this one looks to have many challenges.
Volt Information Sciences (VOL), one of the two Industrial names, trades above its lows from this summer as well as the early 2009 lows, but is a shadow of its former self (almost 50 in 1997). The company does several things, including staffing services, technology infrastructure services and information services (directory assistance and operator services). Maybe the complexity is the reason that they are almost two years behind in their SEC filings. Whoops, another data problem for my screening system! One positive is very high insider ownership.
Kimball International (KBALB), which makes furniture components and operates an EMS company (losing money), also has very large insider ownership (10%). This is the only company with no sell-side coverage. The EMS business is likely to improve, as orders are 29% higher than a year ago. The company describes the potential recovery in furniture as long and slow, but orders are up 30% too. This one looks like it's worth a closer look. The chart isn't so great - the stock has a double bottom of sorts, but it made a new multi-decade low in August. Given the high amount of cash net of debt (30% of the stock price), I wouldn't be surprised if these guys pay a large "special" dividend before year-end. I have written about this hot trend recently, first here and then here.
Olympic Steel (ZEUS) is the only stock above the single digits and has the best ticker! Not only that, but they have five 5%+ holders. The company, which operates in 15 facilities and just announced the purchase of a new temper mill and cut-to-length line in Gary, IN, distributes large volumes of processed carbon, coated and stainless flat-rolled sheet, coil, and plate steel and aluminum products. Sales have been booming, but profits have lagged as the company purposefully seeks to gain share. The stock seems to have very good support near 22, a level that was support in 2006 and 2007 and then resistance in late 2008 and early 2009. I find this one interesting too.
Finally, RRI Energy (RRI), which is in my neck of the woods (Houston) and was formerly Reliant Energy, provides wholesale and retail electricity in Texas, Pennsylvania, New Jersey and Maryland, is holding its lows from late 2008/early 2009. In April, it announced a merger with Mirant (MIR). Weak natural gas prices and soft electricity prices have hurt both companies. MIR too trades WAY below TBV (.3X), but we excluded it from the list in error I believe. It has net cash on the books. Once the deal closes next month, the combined entity will have a very strong balanced sheet. GenOn is probably worth checking out further. A final observation: Very concentrated ownership in RRI and MIR, with each having five 5%+ holders totaling 40% and 37% respectively. MIR's largest shareholder is Paulson & Co (12%).
So, we have briefly looked at 9 beaten up names, several of which seem to merit further attention. The bigger takeaway, though, is that this is a great time of the year to be digging in the trash can. I made the huge mistake of throwing away most of the turkey carcass this week, but, fortunately, we were able to use what I didn't toss to make some delicious soup. Similarly, one man's tax-loss sale is another's potential big winner next year. I recently used this logic to add Insteel Industries (IIIN) to the Top 20 Model Portfolio over the past month at an average price of 9. It wasn't below tangible book value, but it was right there, offering limited downside and potentially big upside when industry conditions improve. We got lucky, as they announced a seemingly brilliant acquisition last week. Now, we have a cheap stock with a catalyst rather than just a cheap stock.