Netflix, Amazon Shine In 2015; Energy Stocks Stumble by John Dorfman, Dorfman Value Investments
The stock market ran in circles this year and is little changed as the year’s final days tick down. But there were some mighty gainers and desolate losers.
Here are five of the year’s star performers and five of the goats.
The winners …
Among the 500 stocks in the Standard & Poor’s 500 Index, Netflix Inc. (NFLX) — up 144 percent —was the best gainer through Friday. The company has been ingenious in conveniently delivering TV shows and movies to the public, allowing people to binge-watch or nibble on any timetable they want.
I admire the company. I loathe the stock.
Why? Because it sells for multiples of intrinsic value for which no stock should ever sell. Netflix shares command 457 times earnings, eight times revenue and 24 times book value (corporate net worth per share). I consider those ratios insane, dangerous and bloated (respectively). I am considering selling the stock short, betting on a decline.
Amazon.com Inc. (AMZN) is the second-best gainer, up 106 percent. At 917 times earnings, 3.1 times revenue and 25 times book value, Amazon shares are in orbit, much like Netflix’s shares. Though the stock is immensely popular, I think it’s imprudent to hold at a price of near $640 a share.
More reasonably priced is the year’s third-best gainer, Activision Blizzard Inc. (ATVI). This maker of video games has had big hits with its Call of Duty, Starcraft and Warcraft series. The stock is up 84.7 percent this year and sells for 25 times earnings. That’s more than I would pay, but it’s a multiple that a reasonable growth investor might accept.
In fourth place, up 62 percent, is NVIDIA Corp. (NVDA), a semiconductor chip maker. It is well positioned in chips used in cloud applications, but the stock seems fully priced at 30 times earnings.
Coming in fifth among the 500 stocks in S&P’s well-known index is Total Systems Services Inc. (TSS), up 58.2 percent. The company, based in Columbus, Ga., is a leader in electronic payment processing, especially for banks. The stock, which had a big rise this year, fetches 27 times recent earnings and 20 times analysts’ projected earnings for 2016. Again, I wouldn’t pay it, but a reasonable person might.
… and losers
The three largest decliners in the S&P 500 were Consol Energy Inc. (CNX), down 79.3 percent; Chesapeake Energy Corp. (CHK), off 78.7 percent; and Southwestern Energy Co. (SWN), clipped by 78.3 percent. All are losing money. If you’re a commodity supplier and the market price of your commodity falls more than 60 percent, you can’t escape unscathed.
Of the three, the one I believe has the best prospects for recovery in 2016 is Consol. Its debt is still less than stockholders’ equity, and its stock sells for only 0.37 times book value. But I would not buy it yet, as I believe the selling climax for energy stocks has yet to arrive.
The one I am most concerned about is Chesapeake. It has debt equal to 255 percent of equity, the legacy of what I believe was a reckless expansion program under previous management.
Freeport-McMoRan Inc. (FCX), a copper and gold producer, has suffered a 70.4 percent drop. Investors who loved gold five years ago now are indifferent, and copper has fallen along with the commodity complex in general. I like this stock as a turnaround speculation, but I must warn you that I have owned this stock a couple of times and never made money on it.
Fossil Group Inc. (FOSL) fell 66.6 percent. The Richardson, Texas, company makes watches, wallets, handbags and other clothing and accessories. Its watch business was hurt by the Apple watch, which does things traditional watches never dreamed of. Despite the new and formidable competition, I think this unpopular stock has comeback potential.
I wrote columns similar to this one in 2012, 2013 and 2014, giving my take on the year’s big winners and losers. On average, the stocks I’ve recommended have risen 14.8 percent, while those I said to avoid have risen 5.9 percent. So far, so good, but you could have done better by just sticking with the previous year’s winners, which rose 19.4 percent on average. Buying the losers would have been an uninspired strategy: They returned an average of 5.5 percent.
Results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results.
Disclosure: My wife owns shares in Nvidia and Total System Services. I do not own the other stocks discussed in this column personally or for clients.