Bargain Hunters Might Find Some Values In Stock Market by John Dorfman, Dorfman Value Investments
Stocks just finished their worst quarter in four years, producing stomach aches all across America. But for bargain hunters, things are looking up.
Dozens of stocks fell 20 percent or more during the quarter, and I believe some of them are bargains. There is plenty of fodder for my quarterly Casualty List, which contains stocks that have been beaten up in the latest quarter and that I expect to make a full recovery.
I’ve been compiling the Casualty List since 2000. The one you are reading is the 50th one.
Gates Capital Management's Excess Cash Flow (ECF) Value Funds have returned 14.5% net over the past 25 years, and in 2021, the fund manager continued to outperform. Due to an "absence of large mistakes" during the year, coupled with an "attractive environment for corporate events," the group's flagship ECF Value Fund, L.P returned 32.7% last Read More
One-year returns can be calculated for 46 of the lists. I’ve been pleased with the average return, which has been 20.2 percent. By comparison, the average return on the Standard & Poor’s 500 Index over the same 46 periods has been 9.3 percent. Thirty-four of my 46 Casualty Lists have been profitable, and 27 have beaten the index.
Notwithstanding the good long-term record, my list from a year ago was an unmitigated disaster. All four stocks I picked – BHP Billiton Plc (BHP), Conns Inc. (CONN), Oshkosh Corp. (OSK) and Powell Industries Inc. (POWL) declined, with an average loss of 21.8 percent from Oct. 7, 2014, through Oct. 2. BHP, one of the three biggest mining companies worldwide, fell hardest. Its 35 percent drop reflected a sudden drop in demand by China for raw materials.
Bear in mind, both when results are good and when they’re bad, that past performance may not predict future results. The performance of my column picks is theoretical and doesn’t reflect actual trades, trading costs or taxes. And the figures for my column selections shouldn’t be confused with returns on actual portfolios I manage for clients.
Joy Global Inc. (JOY), a manufacturer of mining equipment, was one of the biggest casualties, down 58 percent in the third quarter. I know that China is buying a smaller volume of coal and metals than before, and that the world’s mining industry is hurting. But the decline in Joy is overdone, in my opinion.
Joy shares now sell for about $15, down from a high of about $100 in 2011 when raw-material stocks and their suppliers were all the rage. The current price works out to six times recent earnings, 0.4 times revenue and 0.5 times book value (corporate net worth per share). Those are severely depressed multiples — or to put it another way, my kinds of multiples.
Several Joy insiders have bought shares recently. One was Edward Doheney, the chief executive officer, who paid about $479,000 to buy shares on the open market last month, even though he receives a lot of stock through the company’s compensation system. Joy also pays a rich dividend yield of 5.6 percent, which does not seem in imminent danger of being cut.
Kulicke & Soffa
Another out-of-favor industry is semiconductor equipment. Semiconductor sales have been weak lately. And while the chip-making companies are cyclical, the companies that supply them with equipment are even more so.
That’s one reason Kulicke & Soffa Inc. (KLIC) stock was down 22 percent in the third quarter. Based in Singapore but with major operations in the U.S., the company makes a variety of equipment including bonding devices and chip-cutting saws.
This is a straight contrarian value play — “buying straw hats in January,” as the saying goes. The stock sells for 10 times recent earnings, 1.1 times revenue and 0.9 times book value.
Down 28 percent in the third quarter was Gap Stores Inc. (GPS), parent to Old Navy, Banana Republic, and of course the eponymous Gap chain. All three have been struggling lately but over the years, they have not missed fashion trends too often, and have recovered quickly when they do. Therefore, I consider Gap a good comeback candidate.
Gap shares usually go for about 15 times earnings. Lately the multiple is 11, and 10 times analysts’ profit estimates for next year.
Analysts, always eager to abandon what they think is a sinking ship, have deserted Gap. Of 33 Wall Street analysts covering the stock, only four recommend it. It’s possible that the analysts are right, but in this case I doubt it.
Over the years, Emerson Electric, a maker of small motors and other electronic parts, has usually sold for about 19 times earnings, because of its enviable earnings record.
Its sales and earnings growth have slowed lately, producing a jolting 20 percent decline in the stock last quarter and a big decline in valuations. Today the stock sells for a mere 12 times earnings.
I don’t think the market for Emerson’s products has changed fundamentally, and I like the shares at this price.