5 High Profile S&P 400 Mid Caps You Don't Want in a Portfolio

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Includes: AOL, KBH, ODP, OSGB, RYL
by: Steven Bauer

Given the substantial move in many equities since early 2009, it is quite likely that selectivity will be even more important when investing in 2011. So, the focus remains the same; that is, we invest in companies that project to grow meaningfully faster than their peers and avoid the others. Here are five high-profile midcaps that are not poised to out-perform.

These companies are selected based on the following supportive analytics in both their short and longer-term price performance. I expect them to continue to be under pressure in the coming weeks and perhaps months. Within my analytics, I compare securities using three disciplines (weighted fundamental, technical and consensus analysis). When they rank “excellent or very good” within these disciplines I buy them confidently. However, when they do not compare well, I avoid or short them.

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Earning estimates for these companies are negative for the short-term / intermediate-term, and the longer-term for a couple. It appears, according to comparative analytics, that their upside is quite limited. Timely news for each company has been checked by me and should be reviewed by you also. Remember, each company is unique in its own realm.

As a major Index the S&P 400 or Mid Cap Index always has other more compelling companies for you to hold, so please do not be offended that I am not currently positive about these particular companies at this time. You can have a better return on your investment dollars in numerous other low risk companies, whether your consideration is long or short. That means two things: the projected price and the risk / reward ratio must be in the top 5% for bullish and / or bottom 5% for bearish on my respective long or perhaps short candidates.

Valuation Analytics Table

Stock and Symbol

Approx. Current Price

My Target Price % Above (+) / Below (-) Current Price.

PEG

P/E

Forward P/E

Valuation Divergence (%)

(One - Year Projected to a Mean) from the next - - Bullish Inflection Point.

1. AOL, Inc. (NYSE:AOL)

20.9

Negative 10% to 20%

73.3

-2.8

18.9

Negative

Comments: AOL, Inc. as a leading Internet Services company appears to be quite anemic, and this condition may last for a long time. AOL currently offers a "very poor" valuation and a negative short-term target price projection. When the focus is very bearish that can be a plus if your focus is to sell or perhaps take a short position. The longer-term earnings growth projects to be contracting in the coming years (2 – 4 years). Reviewing the technical and consensus analysis offers the same negative picture. It appears that AOL has entered into a longer-term down-cycle.

2. K B Home, Inc. (NYSE:KBH)

13.4

Negative 10% to 20%

-159

14.8

17.1

Negative

Comments: As you know, the vigor and vitality of K B Home, Inc. has been waning for quite some time. Although valuations are still "poor" and the short-term target price is negative, the longer-term earnings growth (perhaps beginning in a couple of quarters) appears to be on the mend. With this information and data in hand, KBH is currently one the best of these five companies. It also continues to maintain its position in the Home Building industry group. (See similar comments on RYL below.)

3. Office Depot, Inc. (NYSE:ODP)

5.3

Negative 10% to 20%

6.6

-534

19.8

Negative

Comments: I suggest that there are much better candidates for possible shorting, so despite the "negative" valuation and target price projections, I would just let Office Depot work through its current problems before investing or holding. Longer-term earnings growth (one - two plus years) appears to be improving. My technical and consensus analysis confirms that ODP is currently not a very positive Retail – Misc. component

4. Overseas Shipholding, (NYSE:OSG)

35.0

Negative 10% to 30%

-2.3

-9.8

24.7

Negative

Comments: Unless I am also bearish on the industry group (in this case, Shipping) and focused on shorting a company, I dislike the projected longer-term earnings erosions - hence “poor / very poor” valuations and target price projections. So, if I am bearish, I then want the projections of the next two or maybe three years plus earnings growth to be negative. Currently OSG is "negative" regarding its earnings but appears to have the prospect of improving earnings within the coming year. I would still pass on holding or giving consideration to buying OSG for at least the intermediate-term.

5. Ryland Group, Inc. (NYSE:RYL)

17.5

Negative 10% to 20%

-4.9

-9.9

20.1

Negative

Comments: The vigor and vitality of Ryland Group, Inc. has been waning for quite some time. Although valuations are still "poor" and the short-term target price is negative, the longer-term earnings growth (perhaps beginning in a couple of quarters) appears to be on the mend. With this information and data in hand, RYL is currently one the best of these five companies. It also continues to maintain its position in the Home Building industry group. (KBH and RYL currently look very much alike.)

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Summary of the Three Disciplines:

Company Symbol

Category

Fundamental

(weighting 40%)

Technical

(weighting 35%)

Consensus

(weighting 25%)

1. AOL

High Profile

Very Poor

Good

Poor

2. KBH

High Profile

Poor

Good

Poor

3. ODP

High Profile

Poor

Good

Poor

4. OSG

High Profile

Poor

Good

Poor

5. RYL

High Profile

Poor

Good

Poor

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The general market is currently over-valued, over-bought and is showing signs of deterioration, especially in the area of breadth. Interest rates are on the rise, and inflation is already a serious problem. These mid cap companies along with many others are vulnerable to a general market pullback and that means that you must consider holding cash or perhaps taking bearish positions. I would not recommend taking short positions in any of these securities.

My focus for all companies, mid cap or other, is investing wisely. That is a methodology of taking advantage of the bull/bear cycles as they occur within the overall marketplace. Integrating fundamental / valuation analytics within these technical and earnings cycles require maintaining a process of the thorough and ongoing analysis of many companies, sectors and industry groups. I believe this is a vital discipline in investing wisely.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.