The Suck Dogs of the S&P
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?
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
Thanks for reading everyone. Happy Almost New Years!