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The Suck Dogs of the S&P

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December 29, 2012 – Comments (10) | RELATED TICKERS: ATI , EXC , JCP

Most people who are interested in investing have heard of the old "Dogs of the Dow" theory.  The following interesting Barron's article supports the thesis that this years losers might just be next year's winners on the stock market...though the "Dogs of the S&P" doesn't have quite the same ring to it.  Perhaps we could change it to something like the "Suck Dogs of the S&P."  That sounds a little better.  

According to the Barron's piece: 

One early-year investment strategy is to buy the prior year's 10 biggest losers in the S&P 500 in hopes that they'll bounce up in early January. 

This approach has worked well in the past three years. In fact, the 10 biggest decliners from 2011 started 2012 with a bang, gaining an average of 13.7% in the first two weeks of January, compared with their Dec. 31 close, against a 2.5% rise for the overall index... 

Holding on to most of those 10 stocks for a full year hasn't been a bad move, either. They were up, on average, 25.9% through Thursday, double the S&P 500's 12.8%... 

The phenomenon isn't a one-year wonder. The S&P's 10 worst performers of 2010 were up an average of 9.4% in 2011's first two weeks, against a 2.8% rise in the index, while the worst 10 in 2009 jumped 10.2% in the initial two weeks of 2010, way ahead of the S&P's 1.9%. 2008's 10 worst decliners trailed the market in early January 2009, but scored a 160% average gain for the year. 

Interesting.  So what were the biggest S&P losers of 2012?  

They were: 

1. Apollo Group (APOL), aka University of Phoenix

2. Advanced Micro Devices (AMD), chips

3. Best Buy (BBY), consumer electronics

4. Hewlett-Packard (HPQ), the definition of mid-management

5. JC Penny (JCP), clothing retailer and Bill Ackman's baby

6. Pitney Bowes (PBI), postage machines 

7. Cliffs Natural Resources (CLF), mostly coal and I believe some iron

8. Allegheny Technologies (ATI), producer of specialty metals

9. Exelon (EXC), Power company [thank goodness I sold this one a long time ago, whew]

10. Electronic Arts (EA), video games 

So, of these companies, which ones interest me? Pitney Bowes has been gouging its clients for years and it's going right down the tubes with the U.S. Postal Service.   

AMD is losing money and getting repeatedly kicked in the teeth by Intel, whose stock isn't even doing that great itself. 

At first I completely dismissed JC Penny, but the always interesting Vitaly Katsenelson makes a decent case for it in a recent article on Institutional Investor (Bargain Hunting at J.C. Penny - http://www.institutionalinvestor.com/blogarticle/3129752/Bargain-Hunting-at-JC-Penney.html) saying: 

Before Johnson took over Penny's sales and earnings had stagnated for years.  Sales per square foot were about $150, lower than Kohl's Corp.'s $194 or Nordstrom's $431 but still a high number considering how stale and unexciting Penny stores were.  Now that figure is closer to $115, but there are definite signs that the new strategy is working, with in-store specialty shop sales running at $186 per square foot, double those in the rest of the store and 30 percent higher than before the stores were redesigned. 

He goes on to talk about Penny's financial situation and how they are not going bankrupt because they have billions in cash and untapped loans. 

The best thing about Penny's is that the success bar is set very low.  Since he took over, Johnson has taken out over $900 million in costs.  Its sales per square foot should rise in every redesigned store.  If Penny achieves the pre-Johnson level of $150 per square foot and gets to keep $700 million of cost cuts, its earning power will be $3 to $4 per share.  If sales per square foot come back o the 2007 peak of $170, earnings will jump to $6 per share.  Considering Penny's stock is trading at around $19...this is one cheap stock for the long run. 

I can see picking up some JCP in CAPS, but I doubt that I could bring myself to put any real money into it. 

The author of the Barron's piece, Andrew Bary says that these three look cheap: 

A few look inexpensive, based on projected 2013 earnings, which could lead to strong stock-market performance next year if those profit estimates pan out. HP, at $14, trades at four times estimated profits for its fiscal 2013 year, which ends in October, while Best Buy, at about $12, fetches less than five times estimated 2013 net, and Apollo Group (APOL), a leader in the for-profit education industry, trades at about $20, or seven times estimated 2013 earnings. 

To me, Best Buy seems destined to go the way of Circuit City, but who knows.  Either way, it's not for me.   

HP is a hot, steaming mess.  It couldn't have been managed any worse over the past decade.  Take a look at what IBM did to transform itself and then look at HP and shake your head.  I still think that there might be value there if it was broken up and sold off, but so far that doesn't seem to be happening, at least not yet.   

I personally have never been a big fan of on-line colleges and they have been hammered in the news and by the government lately, but I can see this potentially being a decent investment.  Probably not one for me, but still a possible winner. 

Allegheny Technologies and Exelon seem like businesses that I could buy into as well.  As a former shareholder (again thank goodness former), I am very familiar with Exelon.  The reason that I sold it is when I did was that it didn't fit in with my cheap with a catalyst investment style.  I didn't see any event that was going to unlock the value here.  I'm still not sure that I do, but it's a whole lot cheaper today than when I owned it.  That might be enough. 

I know next to nothing about Allegheny.  Heck, I had to look up what they even did, and that's unusual for me. I'm going to do some more research on them. 

I'd love to hear others' thoughts on any of these companies, particularly Allegheny.

Winning With Losers

http://online.barrons.com/article/SB50001424052748704723404578199522983480786.html?mod=BOL_hpp_mag

Thanks for reading everyone.  Happy Almost New Years!  

Deej

10 Comments – Post Your Own

#1) On December 29, 2012 at 7:45 PM, Mega (99.95) wrote:

Before Johnson took over Penny's sales and earnings had stagnated for years.

Right now JCP shareholders would love sales and earnings to be merely stagnating. Johnson's results so far are full-on Mayan apocalypse.

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#2) On December 29, 2012 at 8:27 PM, HarryCarysGhost (99.69) wrote:

http://www.fs.usda.gov/allegheny

 Happy New Years.

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#3) On December 30, 2012 at 10:25 AM, TMFDeej (99.43) wrote:

I've been taking a closer look at Exelon after not paying much attention to it for a while because I sold it and I just don't think that I can bring myself to buy it, even at this level.  

I think that a dividend cut is very, very likely.  That in my opinion would be almost like a special situation in reverse.  Even if it's baked in by the supposedly efficient Mr. Market dividend raises almost always cause stocks to rise and dividend cuts almost always cause them to drop.  I wouldn't be surprised in the least if EXC hacked its dividend in half at some point in the next six months.

With no catalyst to the upside and a very likely one to the downside I don't want any part of EXC, Suck Dog of the S&P or not.  Now if the stock implodes after a divy cut then we can talk

Deej 

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#4) On December 30, 2012 at 11:01 AM, TMFDeej (99.43) wrote:

ATI on the other hand looks a little more interesting.  The only problem, and of course there's a problem with one of the worst-performing stocks out there in 2012, is that it appears to be very, very economically sensitive.  The whole fiscal cliff has led to a little more short-term uncertainty on the economy than I would like, but as I mentioned in an earlier post I'm not concerned about the U.S. economy in the long-run.  I think that things are getting better.

ATI is highly involved in the airline industry, which I think is actually a good thing.  We seem to be entering into a cycle of production of new models which ATI should benefit from.

It also looks like ATI is involved in stainless steel as well, which I believe I recall hearing is a crummy, commoditized business.

My research on ATI continues...

Deej 

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#5) On December 30, 2012 at 11:41 AM, MKArch (99.72) wrote:

Being maxed out in CAPS I just sold my EXC to pick up JCP. I think I originally picked up EXC on an M* recommendation and from what I remember I was banking on a renaissance in nuclear power due to the high price of oil. I haven't really followed this one and only kept it alive hoping to luck out somewhere along the line and get out with positive accuracy and a couple of points.

JCP is actually one of a number of retailers I picked up in CAPS shortly after Lehman fell banking on them all coming back as irrational fear subsided and the economy came out of recession like it always did in the past. JCP was about the only retailer that didn't result in a huge gain for me as the markets rebounded in late 2009 but my CAPS strategy of holding on and hoping to luck out eventually paid off with the new CEO enabling me to get out with positive accuracy and a couple of points.

That being said I like Vitaly's argument for JCP at least in the short to mid term. I don't get fashion and generally I avoid this sector but I do think there are a lot of levers for managment to pull in this sector to turn things around and IMO there's opportunity in the sector when the pendulum swings too far against a company.

This is a good example of my discussion on your recent blog about the value of CAPS. JCP is only on my radar because of CAPS. Who knows maybe I'll be adding EXC back to my CAPS portfolio next year. Thanks for the good work here Deej and Happy New Year! I actually follow Vitaly on his Contrarian Edge web site but I don't see the JCP rec there so I'm glad you posted it here.

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#6) On December 30, 2012 at 12:14 PM, TMFDeej (99.43) wrote:

I completely agree with you about CAPS, MK.  Thanks for posting.  I think that CAPS is awesome.  It's too bad that it seems to have been orphaned.  I honestly think that it could have been as good as SA or any of the other big sites out there if it was done properly.  I guess that isn't probably not all that profitable for TMF on its own, but still there's a lot of value here.  

I've been toying with the idea of adding JCP to my portfolio.  It's so beaten down that it wouldn't take much to boost the stock, but I personally don't see much, if any indication that the public is warming up to it.  This really interesting blog post illustrates just how unpopular the stores remain:

http://seekingalpha.com/instablog/957061-chris-demuth-jr/1374251-a-gift-for-you

Deej 

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#7) On December 30, 2012 at 12:55 PM, MKArch (99.72) wrote:

I'm a fan of SA as well Deej and have actually managed to get a few articles published there under and different alias (Milkweed). To me these are just two good and valuable but different services. I think in general SA's articles tend to be of higher quality than CAPS blogs but no one really knows what the actual track record of the authors is at SA. To me the advantage to CAPS is actual long term track records warts and all. I post on Yahoo message boards as well and it's fun to put some "Yahoo" taking a personal shot at you down by posting a link to my CAPS portfolio (until Yahoo stopped allowing links) and asking the Yahoo to show me what he's accomplished.

 I'm going to do a little more digging with JCP Deej but two things in Vitaly's article that made sense to me is the ability to play the promotion game again if need be and if I read the article right it sounds like for some reason the store within a store concept has only breed rolled out at a few locations so far but will be ramping up over the next few years. Most of my success in CAPS so far has been from not being afraid to take short term pain for long term gain. I might take a modest flier on JCP in my real life portfolio as well once I get a chance to dig around a get a better feel for what's going on with JCP.

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#8) On December 30, 2012 at 4:56 PM, JohnCLeven (77.50) wrote:

Nice post Deej!

Personally, my suck dog in real life is COH which has taken a 30% haircut since April. Over that time I've built it up to my 3rd largest holding after BRK.B and MCD. Those 3 make up about 2/3 of my portfolio. 

I like your suck dog concept, and enjoy your articles in general. Thanks for the contributions.

-John

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#9) On January 01, 2013 at 10:53 AM, chk999 (99.97) wrote:

 I think that CAPS is awesome.  It's too bad that it seems to have been orphaned.  I honestly think that it could have been as good as SA or any of the other big sites out there if it was done properly.  I guess that isn't probably not all that profitable for TMF on its own, but still there's a lot of value here.  

 I'm glad you said this. It's felt to me like CAPS got abandonned a couple of years ago and is running intertia now. Too bad,, this was a revolutionary idea and I hate to see it shrivel.

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#10) On May 21, 2013 at 10:23 PM, lachylan (< 20) wrote:

I followed these 10 dogs from the first trading day of the year and as of 5/22 they are up over 25%.

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