Equity markets have witnessed a serious correction in recent weeks after a strong start to 2012. The S&P 500 (SPY) benchmark lost nearly 6% over the last three months and 10% from the highs since early April.
Within this correction, there are individual companies falling even harder than the general market. In the following I will review the underperformers of the last three months and judge the potential for future returns.
Some investors were unfortunate enough to invest in these companies (at least $1 billion market capitalization), which drastically underperformed the S&P 500. Perhaps a lucky few actually shorted these stocks to make positive returns.
The absolute losers of the last three months were Arch Coal (ACI), Abercrombie & Fitch (ANF), Joy Global (JOY), Herbalife (HLF) and Morgan Stanley (MS). These names lost between 32% and 48% in just three months.
The coal producer continued to get crushed. Shares of the coal producer, which traded at $74 in 2008 have fallen 57% already year to date, and 48% in the last three months alone. The company has been in a downward spiral for years as lower coal prices depress the prospects of the business after natural gas prices hit multi-year lows in the beginning of 2012. Besides a lower outlook and a replaced CEO, investors are afraid of further equity dilution as has been the case in recent years.
Abercrombie & Fitch
Shares of Abercrombie & Fitch were doing fine until the beginning of May this year. Shares of competitor Fossil (FOSL) took a dive as the problems in the eurozone affected its operations in the continent. Halfway through the month of May Abercrombie reported a drop in first-quarter earnings amidst weaker European sales and shares slid from mid-$50s to $32 at the moment, a decline of roughly 35%. An increase in the authorized number of shares eligible for a buyback did not prevent shares from slipping further. Analysts of JP Morgan are not too optimistic about the immediate future of Abercrombie as they note that "international new store productivity continued to show a decline in topline performance out of the gate."
Manufacturer of mining equipment Joy Global has fallen from $95 per share in February to $56 at the moment amidst fears of a slowdown in China, which prompted big miners to cancel or postpone large investment projects. Competitor Caterpillar (CAT) made similar comments about slower growth in China and has fallen 24% over the last three months, compared with 34% for Joy Global. Two acquisitions made by Joy Global last year, in an upbeat market, make investors fearful of goodwill impairments later this year. The correction is boosting speculation about possible merger and acquisition action for the company. Japanese Komatsu or other suitors might be interested in the company.
Herbalife, the network marketing company focused on weight management and nutritional supplements somewhat surprisingly made this list. The sole reason behind the decline is an inquiry of successful hedge fund manager David Einhorn during the first quarter conference call. Einhorn asked some questions about changes made to the disclosure of a certain group of distributors, but Herbalife's CFO commented that the information was neither valuable to the business or to its investors. Speculation about the quality of Herbalife's reporting standards after the incident caused shares to lose a lot of ground. Herbalife's shares have fallen 33% over the last 13 weeks.
By many standards regarded as the weakest Wall Street bank after the massive consolidation round in 2008, Morgan Stanley faced a harsh quarter. Shares peaked at $21 in March amidst optimism after European debt markets recovered after the ECB's LTRO program and the FED's blessing for share buybacks after the latest stress test results. The market has lost a great deal of trust in the bank after the initial public offering of Facebook (FB) ended in a total disaster. Facebook's shares have lost over 30% in a matter of weeks since going public. More worrying are the billions of dollars the firm needs to post as additional collateral in a possible downgrade from the big rating agencies. Furthermore the trading losses at JP Morgan (JPM) will make a more harsh implementation of the Dodd-Frank rule more likely, thereby depressing the bank's earnings capacity. Shares in Morgan Stanley have lost 32% over the last three months.
One thing is for sure. In the next quarter, this list will be totally different. Investors should critically asses their portfolio to prevent ending up with these underperformers, especially amidst a general market correction.
An investor who does his research can still find value, especially in some small- and mid-capitalization firms in an attempt to prevent underperforming in an already sluggish market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.