2012 is off to a fantastic start, but not for every company. While the Russell 1000 is up 7.5% so far, 9 stocks have fallen by more than 20%. While catching the proverbial falling knife isn't always the best strategy, often the crowd overdoes it with the selling. With that in mind, I decided to look at the bottom 1% in terms of performance to see if there might be an opportunity. Here they are, sorted by returns, from worst to just horrible (click to enlarge image):
Before I touch upon each of these in order, let me share how I have laid out the table. I have included net debt to capital because I have found that bad balance sheets temper my enthusiasm for bottom-fishing. A few of the companies have more cash than debt, while several have signficant debt.
I have also included some longer-term price performance, which shows that several of these losers are pulling back in the context of more favorable longer-term performance.
I have included several valuation metrics, including PE (marking the stocks that aren't trading on near-term earnings), Enterprise Value / EBITDA (marking the ones that are less than 5X) and Price to Tangible Book Value (marking the ones below 1.5X or extremely high).
In the last two columns, I color-code for revenue growth, noting several that are shrinking, and include a gauge of price momentum (from Baseline) that indicates two names are extremely oversold.
Exco Resources (XCO) is the first of 5 Energy companies suffering from weak natural gas prices. For those who aren't familiar, this is the company that failed in an LBO at $20.50 by its CEO, Doug Miller, announced at the end of 2010. It is focused primarily on the Haynesville. The company will be announcing Q4 earnings on 2/23. XCO announced its 2012 capital budget of $710mm in November, and will presumably revise it lower. It is currently attempting to sell a 1/3 interest in its midstream and gathering assets for more than $400mm. While it's certainly not unique, the valuation suggests taking a closer look at this one.
I have followed Carbo Ceramics (CRR) for a long time and recently added it to my Top 20 Model Portfolio after their disappointing Q4 report. The stock, which has a short-interest representing almost 20% of the float, has continued lower. The company is enduring some logistical challenges as its business shifts away from the Haynesville. I believe that there are some concerns that regulatory changes could reduce the demand for its proppants, but the most likely geographies that might be impacted are where the drilling is in shallow wells and CRR has limited exposure. The stock is extremely oversold. I peg support now at about 82 and believe that the stock could trade to 155 over the next year based on current 2013 earnings projections and assuming a multiple of 18.
WebMD (WBMD) called off its search for a buyer, plunging on January 10th as its CEO was terminated. Citing competition on the consumer front, the company offered guidance for 2012 that revenues would decline while expenses would rise. Analysts slashed their 2012 EPS projections in half, with the company now expected to earn .46, down from a projected 1.22 in 2011. WBMD will report earnings on 2/23. Funds associated with Carl Icahn own over 6.6mm shares (12%) and are pressing the company to repurchase stock.
Education Management (EDMC) is trading near its IPO price from late 2009 after doing a big round-trip and recovering to all-time highs late in 2011. Unlike most of the other stocks on this list, it's not substantially below its 200-day moving average. In the most recent quarter, sales and earnings declined as student enrollment dipped. In January, same-school enrollment was 10% below year-ago levels. The company has been aggressively repurchasing stock since June 2010, reducing the share count by over 10%.
RPC (RES) seems pretty confident in its future, boosting the dividend by 20% and announcing a stock split when they reported earnings in January. The oilfield services company grew sales by 47% in Q4, but net income advanced "only" 35% as gross margins were negatively impacted by labor and material costs. Analysts slashed their 2012 expectations following the report, with the consensus EPS declining from 2.62 to 2.15, which is about 6% higher than 2011 earnings.
Quicksilver (KWK) is another primarily gas-producing E&P company. They just announced the IPO of their MLP, Quicksilver Production Partners (QPP), which will allow them to drop down assets and reduce debt. The company also announced that it has a substantial hedge of its gas and gas-liquids. In late January, it updated its 2012 capital spending plans, announcing a $370mm program, with about 1/2 directed to Canada. It expects that 80% of production will be gas, with the balance in gas liquids and oil. The company reports Q4 financial results on 2/27.
RadioShack (RSH) was hammered back to its 2009 lows in late January when it shared preliminary Q4 results that were terrible. It's still not so clear to me how they could be blaming Sprint (S) for so much of the weakness in earnings. While sales rose 6% (3% on a same-store basis), Q4 earnings are expected to decline about 75%. CEO Gooch, the former CFO who was promoted last year when Julian Day, the former CFO of Sears (SHLD) and CEO of Kmart who joined to RSH in 2006, was ousted, will likely be grilled when the company reports results on 2/21. This stock is dirt cheap by several metrics, though it is hard to get excited about the company's prospects.
Frontier Communications (FTR), which reports Q4 financial results on 2/16, chopped its annual dividend in 2010 from $1.00 to $0.75 but affirmed its commitment to this level in October. With the dividend representing about 2/3 of free cash flow, the company has little room for negative surprises. With an 18% yield, one has to think that investors aren't counting on it being sustained.
Ultra Petroleum (UPL) is the last of the companies suffering from low gas prices. Their wells in Wyoming have always been very low-cost, and they have helped soften the blow from declining prices with hedging. In the 3rd quarter, the company grew Marcellus production by 155% and affirmed 2011 production growth of 15-19%. The company has been spending more than its EBITDA on drilling, but it has a relatively safe balance sheet, with no maturities until 2015. UPL reports Q4 financial results on 2/16.
I have already shared that I like CRR, whose decline is somewhat related to the decline in gas prices, but I also like the idea of investing in E&P companies. The stocks have reacted (overreacted?) to terribly depressed spot gas prices, but the forward strip, while still low, suggests the decline is just temporary. Gas prices tend to be very volatile, and the market is acting fairly rationally, with several companies cutting production. I think RSH is worth further investigation as well.
Disclosure: CRR is in the Top 20 Model Portfolio at Invest By Model