Will 2009's Losers Become 2010's Winners?

by: Alan Brochstein, CFA

Last year, only 22 of the companies in the S&P 500 were able to manage gains (DV was added to the index this year). As you can see in their returns thus far in 2009, only two of them have managed to beat the market's 22.5% increase this year:

Sp500 winners 2008
Given the lack of persistence in the strong staying strong, I wonder how this year's weak (which includes many above) will fare in 2010. Of the 500 current members of the S&P 500, 86 are currently down thus far in 2009. Every single sector is represented:

  • Energy: 6
  • Materials: 3
  • Industrias: 10
  • Consumer Discretionary: 9
  • Consumer Staples: 7
  • Healthcare: 8
  • Finance: 26
  • Tech: 4
  • Telecom Services: 4
  • Utilities: 9

In order to narrow the list, I wanted to kick out companies that have a lot of debt or that seem to be in an extended decline. I also wanted to make sure that they were profitable and not too expensive on a PE basis. So, here is what I did:

  • 2008 return > -40%
  • Net Debt to Cap < 35%
  • Forward PE < 25

Here are the 27 names that made the cut:

Sp500 2009 losers

I don't follow closely too many of these names, but C.R. Bard (NYSE:BCR) is in both my Top 20 Model Portfolio as well as the Conservative Growth/Balanced Model Portfolio. I recently sold Flir (NASDAQ:FLIR) out of the Top 20 Model Portfolio after acquiring it this summer. Public Storage (NYSE:PSA) is on my Watchlist and is one that I favor at a lower price.

Running through some highlights of the list, I am not a big fan of Energy these days. Exxon (NYSE:XOM) is probably ok, while Devon (NYSE:DVN) is interesting in that its recent strategic move of focusing on its shale play could boost the valuation. Lockheed Martin (NYSE:LMT) is one of just many defense companies that look attractive. Devry (DV) has caught my attention lately, and I am hoping to get to know the story better. The entire sector has been under pressure lately due to regulatory concerns as well as some business challenges. H&R Block (NYSE:HRB) is one that I have never really liked, but I have to admit shock with what they have done to clean up their balance sheet.

The Healhcare names are dominated by large biotech companies, and I don't have a strong view. It does seem that pricing could be a negative ahead. BCR, on the other hand, is a device company. I like it because it is extremely diversified with exposure to consumables. This year has been challenging due to a change in stocking levels at hospitals, but the company has leading products in the areas of vascular, urology, oncology and surgery.

It's probably worth spending some time with these Financials to see if there are any babies in the bathwater. It's been a bad sector this year - most of these are insurance companies. Finally, Integrys (NYSE:TEG) is interesting to me. It is one of the higher yielding utilities (6.4%) and has a very strong balance sheet for the sector (lots of cash). The company has a high payout ratio, but it has hiked its dividends annually for the past 37 years.

As always, screening is just a starting point, so these ideas are very preliminary for the most part. We are already seeing some interest this month in lagging parts of the market this year, so perhaps some of these names capture investor interest in the coming weeks as we move into the new year.

Author's Disclosure: No positions in any stocks mentioned, but BCR is in both of my model portfolios