One of the biggest challenges for stock-pickers is balancing the three dynamics required to get it right: Fundamentals, Technicals and Valuation. I sometimes joke that this market has been so crazy that I don't think I could guess the reaction of a stock even with the press release in advance.
While the market is filled with both Bulls and Bears, it seems to me that all can agree that the fundamentals are challenging now. I have been saying this for quite some time, and I have little confidence that the economy will be strong anytime soon.
On the other hand, even Bears will concede that valuations are pretty low generally. The Bear case is typically built on expectations of the economy slipping into recession again and lowering earnings to levels well below what companies are currently producing. I tend to look at the earnings yield of the S&P 500 (the inversion of the PE) and compare it to corporate bonds, and it remains quite extreme in favor of stocks.
So, given the opposition of valuation and fundamentals, which is basically saying things stink but everyone knows, I think it's more important than ever to focus on the technicals. From my perspective, they are positive, with just one more hurdle before even the most pessimistic observer would have to declare that the correction is over (clearing the early April highs, which are less than 3% from here).
I have found over time that predicting the turn in fundamentals is much harder than figuring out the technicals or the valuation. Economists are renowned for being able to explain rather than predict! So, it's especially important to listen to the market right now. If you agree with me that it's trying to tell us something, you might like this screen I have constructed (using Baseline).
My goal was to find some poorly performing stocks that have shown strong near-term momentum in the face of falling earnings estimates. To me, this type of action is saying that perhaps the market has "overdone it". So, here is what I did:
- S&P 500 member
- Trailing S&P 500 YTD by >10% (so down more than 0.2%)
- Beating S&P 500 MTD by >5% (so up more than 6.8%)
- Price > 50dma
- Earnings Estimate Revisions (3 Months) < 0%
- 2013 Projected EPS Growth > 10%
Summing up the parameters, I was looking for stocks trailing substantially YTD but up more than the market in July. The stocks have achieved the technical hurdle of breaking through their 50dma. The analysts have been cutting estimates for this year but expect these stocks to grow at least 10% in 2013, which is faster than the S&P 500's projected 7% growth. Here are the stocks that made the cut, sorted by YTD return (lowest to highest):
I am up to speed on a few of these and will share some thoughts. First, though, let me describe the columns I have included after sharing the caveat that these aren't recommendations but rather suggestions for stocks to research further.
I highlighted in the forward PE ratios in green for those below 11X and in red for those above 15X. In the next column, though, it's apparent that most of the stocks trade well below their 10-year median PE, with those trading at <80% marked in green and those more than 120% in red.
I had required all of the stocks to be trading above the 50dma, but I also included the longer-term 200dma. Three of the stocks, marked in green, have regained it, while most trade at least 10% below.
Most of the stocks are experiencing double-digit negative earnings revisions. In the final column, I included short-interest relative to the float. Note that four of the companies have greater than 5% short.
I don't know Ryder System (R), the truck leasing company, too well. It has a lot more debt than I typically like to see. They reported their quarter on 7/24 and rallied big after raising their 2012 guidance from 3.65-.85 to 3.75-.90. In late June, the stock plunged when they cut it from 4.02-.12.
Abercrombie and Fitch (ANF) is a retailer that has caught my attention, along with Kohl's (KSS), which I will discuss below. Both of these stocks hit another screen I ran for an article I wrote for TradeKing (5 Clothing Companies Near 10PE):
Abercrombie & Fitch really stands out to me. Over time, its fortunes seem to ebb and flow, as it, along with rivals American Eagle (AEO) and Aeropostale (ARO) battle it out for the teen customer. AEO and ARO are up big this year, while ANF is down big. I happen to like AEO's management team more than this one, but the valuation difference is compelling, as AEO trades at 16PE. ANF has been expanding rapidly in international markets, a move that has concerned investors. Insiders own almost 4%. ANF bottomed near 14 in late 2008 and trade as high as 78 before declining sharply since October.
Flir Systems (FLIR) is one on my watchlist. I think it's a great company with good industry position for its infrared technology in both commercial and defense applications, but this is likely just a short-term bounce. The stock was overdone to the downside. It took a couple of days to bounce after reporting really bad earnings. The contrarian in me likes the idea of buying it while its out of favor, but I don't think that they reset the bar low enough.
Hess Corp (HES), the E&P company with refining and marketing, looks cheap both compared to earnings as well as relative to its tangible book value (.8X). The stock rallied when they reported a strong earnings number last week and hiked their CapEx budget while also increasing their asset sales.
I have never been a fan of Sandisk (SNDK), but it has an interesting chart here (island bottom). The company rallied sharply last week after beating the EPS consensus, with the CEO sharing optimism about industry fundamentals.
Tiffany (TIF) reported a pretty ugly quarter in late May, reducing its FY12 earnings outlook from 3.95-4.05 to 3.70-3.80 and highlighting a weak start to Q2. Further, Elsa Peretti appears to be looking to sell Peretti Intellectual Property as she will be retiring, a big investment for TIF that the company says will boost cash flows and operating results in later periods. This one seems like a good chance to buy a franchise on sale.
Juniper (JNPR) has been in a terrible decline over the past 18 months, losing over 2/3 of its value before the recent rally. The company beat the consensus last week and rallied despite sharing below-consensus guidance for FY12-Q3. The PE here may seem high, but the company has a ton of cash net of debt (almost $5 per share) and trades at <8X EV/EBITDA.
FMC Technologies (FTI) is leveraged to deep water development, so it sure seems timely based on what I have been observing. This is a company that always trades pretty expensively. The company reported on 7/24 and guided EPS above the 2.09 consensus for 2012 (2.10-2.20).
Anadarko Petroleum (APC) has been experiencing a lot of success with its drilling program in West Africa. The company, which recently promoted its former CFO to CEO (a move I like), doesn't stand out valuation wise relative to some of its E&P peers that I prefer, but it looks reasonable given its growth in production. The company hasn't reported yet (7/31). If you are looking into this one, you should be aware of a huge litigation issue with Tronox. If you are interested in learning more, Barron's had an article earlier this month discussing the bull case as well as the Tronox litigation.
I haven't looked at Leggett & Platt (LEG) in years, but the furniture components company is a play on the housing recovery. It trades at over 10X EV/EBITDA, which seems high compared to other companies that might benefit from the same trends. The company boosted EPS guidance last week, indicating that it expects to earn 1.35-1.50 compared to a prior consensus of 1.31. It kept its top-line outlook relatively unchanged, with analysts forecasting 4% growth in 2012 and 4% in 2013.
Google (GOOG) is extremely confusing these days. I wrote recently about what I think is a major overhang that is keeping me cautious. I hold the stock in my Top 20 Model Portfolio, having added it after the Q4 report in January, though we trimmed it on the strength late in the week following earnings. Between the Motorola acquisition, European challenges, transition from desk to mobile, and a CEO change (plus the issue I discussed that is concerning me), there is plenty to keep a lid on the stock. The quarter was just alright, but that was pretty good in comparison to the universal fear going into the report.
Finally, Kohl's looks very interesting to me and is the one at the top of my list to investigate further. Here is what I said in the TradeKing article:
Kohl's , which sells moderately-priced clothing and housewares in its free-standing department stores, started the year great but has pulled back since February as sales have been soft. So far in 2012, overall sales are flat while same-store-sales have declined slightly following a very weak June. This one looks very inexpensive to me, trading at 60% of the median PE over the past decade. Insiders own almost 9%. After recovering with the market in early 2009, the stock has been trading sideways for the past three years.
So, we have briefly looked at 12 stocks that have rallied in the face of weaker near-term trends and that appear to be in good technical shape. If the market is indeed shifting to a more bullish stance, some of these laggards could continue to recover their early-in-the-year price declines. Clearly some investors are willing to make that bet already.
Additional disclosure: GOOG is held in one or more model portfolios managed by the author at InvestByModel.com