On Tuesday, as the markets were trading lower, a report from CNBC on the L.A. Dodgers caught my attention and led me to ask the question of which company could become the Dodgers of the market in 2012? The report on CNBC was talking about the Dodgers' incredible turnaround, which has occurred in only one year, seemingly overnight.
In 2011 the team was in disarray with the public divorce of owners Frank and Jamie McCourt and sales plummeting 17%. In 2011 the team was losing games and ticket sales were down 7,000 per game compared to the year prior. However, under new management, the difference in 2012 has been night and day. The Dodgers currently lead the NL West, ticket sales are up 13% (6th in the league), and Forbes estimates that the club will see operating income of $20 million for 2012, versus just $1.2 million in 2011.
It's safe to say that it has been a remarkable turnaround for a baseball team that was in bankruptcy with empty seats just last year. This incredible story of a successful turnaround got me thinking about which stocks are positioned to experience a similar turnaround. Right now there is a ton of value in the market as stocks are priced particularly cheap. Therefore, it shouldn't be hard to find a company that could possibly experience this level of success during the final six months of 2012. Below are four companies that I believe could become the L.A. Dodgers of 2012, and turnaround a rough start to the year, and trade significantly higher.
Green Mountain Coffee Roasters (GMCR) may seem like a long stretch for a turnaround story, however you must remember that it is priced for the worst case scenario. The stock is currently trading at $21.71, a YTD loss of 51%, and a one-year loss over 75%! In one year the stock has gone from being a momentum stock to fair value, with a P/E ratio of 10, and is 3x cheaper than Starbucks (SBUX) compared to sales. In fact, GMCR nearly tripled SBUX in both top and bottom line growth during its most recent quarter, which was a quarter that was considered a miss for the speculative company.
Now I must say that I am not bullish on GMCR, however I do acknowledge that it is cheap and that it is priced to reflect a worst case scenario. It is believed that companies such as Kroger (KR) and Walmart (WMT) will steal market share from GMCR with generic k-cups and that if Starbucks is successful in the single-serve space it could take half of GMCR's market share very quickly. My argument for GMCR is if SBUX does not steal the market share and if the company's k-cups become more competitively priced. It could then present value and trade with significant momentum. Of course there are a lot of questions, and the stock itself is a risk, but with the future being unknown, it is a stock that has traded lower for speculative reasons rather than fundamental weakness.
Last week the market was celebrating as General Motors (GM) reported June sales increase of 16%, which caused a two-day rally in shares of the auto maker, leading us to believe its free fall may reverse to trend higher. However, after only three days the stock is now back near 52-week lows, with a one-year loss of 37%.
During the last 18 months, the auto industry has been one of the rare strengths in the U.S. economy. However, its exposure to Europe has created mass fear. But moreso than GMCR, General Motors is priced insanely cheap, and is creating a product that consumers are buying. The stock is trading with a P/E ratio of 5.75 and a price/sales of 0.21, which are metrics that you would expect to see from Research in Motion (RIMM) not a company with 16% sales growth. Therefore, if Europe shows any signs of stability toward the end of the year, or if unemployment numbers decline, then I think GM could rally to a large degree to end the year.
Alcatel-Lucent (ALU) is another insanely cheap stock that has made substantial improvements over the last year. The company's headquarters are in Europe, and there has been a stigma attached to the company for the sake of it having such a strong presence to a struggling economy. However, in 2011 the company posted its first profitable year in more than five years, and is trading with a price/sales of just 0.18. Therefore, the fundamentals are present for the stock to trade higher, and the company's announced several key developments to suggest growth. I believe the one area of concern is the European attachment, but with a good quarter, I think ALU could easily show very large gains over the next six months.
I remember last year when Level 3 Communications (LVLT) was trading over $4 a share (pre-split) and investors believed a Global Crossing acquisition would push the company to a new level, giving it more fiber than any other communication company across three continents, therefore allowing it to succeed. Now fast-forward one-year and the stock is trading at just $20, or $2 before the split, and the company has been unable to gain any positive momentum.
Last year I was the first to say that at $4 with too much debt the stock was expensive. But now it is not, and has value to its stock, as a company that has surprised analysts with its earnings post-purchase of Global Crossing. At first glance the company looks troubled, but you must remember that this is a company that should have went bankrupt on at least two occasions and has managed to overcome obstacles and is now on the right path to growing into a much larger company. I view the company similar to Sprint (S). If Sprint was worth $5 before the iPhone and with declining revenue, then what's it worth with the iPhone and increased sales. Of course Global Crossing isn't the iPhone, but you get the picture.
Earlier this week I released my Q2 earnings preview article, which also included my economic forecast. And in the article I explained that I anticipate a very troubled market over the next several months. However, I also look for more stimulus, and perhaps a clear plan for the turmoil in Europe towards the end of the year. Therefore, if any of these companies were to recover, and perform like the Dodgers, then I think it would be an end of the year push, but that it is very possible with the valuations that are being presented.
Additional disclosure: The material in this article is for informational purposes only and should not be used in making any investment decisions.