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14 S&P 500 Stocks "Half-Off"

I took a look at the stocks in the S&P 500 that have lost more than half their value over the past year.  Why people like to hunt among the hemorrhaging befuddles me, but there probably are a few worth checking out.  

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Buying Post-Earnings Dips

I love earnings season. Don't you? Sure, it can feel like trying to stand in front of an open fire hydrant, but so many opportunities can arise for both short-term traders as well as long-term investors due to the volatility among individual stocks. Time is scarce - institutional investors react swiftly, often buying or selling before they have time to fully digest the news.

Earnings season is particularly busy for me, as I try to keep up with the 100 stocks on my watchlist as well as pay attention to important ones that aren't. This past week, for instance, 30 of the 100 reported, many hosting conference calls at the same time. One morning, I caught four straight live calls, but I tend to end up reading the transcripts for many of them. For those not aware, Seeking Alpha provides free transcripts, which are available on many companies.

When a company reports, there are many possible reactions. The report can can be viewed as "Good", "Neutral" or "Bad", but it's not that easy. To me, it's almost always about the future rather than the recent past. Ultimately, my key question that I want to answer is this: How does the news impact the future earnings? Presumably, if the future is brighter, the stock goes up. If it is dimmer, it goes down. If only it were that easy!

So, when I am judging the quarter, I am looking ahead, but I certainly recognize that many others focus on the short-term. For example, one of the stocks I will address below, Mattel (MAT), missed earnings by 50%. OH MY GOD! The reality is that this was their smallest quarter in terms of earnings typically, and the "huge miss" was rather inconsequential relative to the full year.

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It's Not Westminster: A Look at 9 Dogs

Bottom-fishing is not my primary strategy, as I prefer to see some near-term momentum following longer periods of underperformance, but I confess that I do like to check out other people's garbage.  Here is my recent contribution to Seeking Alpha:

2012 is off to a fantastic start, but not for every company. While the Russell 1000 is up 7.5% so far, 9 stocks have fallen by more than 20%. While catching the proverbial falling knife isn't always the best strategy, often the crowd overdoes it with the selling. With that in mind, I decided to look at the bottom 1% in terms of performance to see if there might be an opportunity. Here they are, sorted by returns, from worst to just horrible:

 

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These Big Stocks with Big Runs Could See Some Selling

Earlier this month, I shared a look at some large-cap winners that might see some gains-deferred selling in early 2012.  With just two trading sessions left, most of these stocks remain near their highs.  This year, with so many losses available to offset gains, the effect may not be as powerful as in years where the market has an overall better performance, but window-dressing (where institutions hang onto winners to "look smart" to their clients) could still play a role.

10 Big Winners in the S&P 500 to Consider Trimming

Big REITs Outperforming Smaller Ones

If you have been investing in REITs this year, you should be happy, right? Maybe you have owned one of the highly liquid ETFs designed to replicate the sector, like iShares DJ Real Estate (IYR), which is up over 9%, Vanguard REIT (VNQ), which is up almost 11%, or SPDR Wilshire REIT (RWR), which is up 11.5%. Nice, right?

Unfortunately, these fantastic returns are misleading, as the typical REIT isn't faring nearly as well. The average return YTD for all REITs in excess of $200mm market cap currently (123 companies) is just 5.4%. Of the 123, 45 are up in excess of 10%, while 39 are actually down in price.

I have had a theory that I wanted to test, so I did. As you can see in the histogram below (click to enlarge), which has YTD return on the y-axis and the market-cap on the x-axis (log-scale), there is a very apparent size bias:

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Cautious on Mortgage REITs

As a frequent blogger, I am often approached by the public about a variety of topics. One of the most common questions over the years has been regarding the Mortgage REITs. I usually answer that they are attractive most of the time and horrible some of the time. This is one of those times I fear could be horrible.

I began my career trading mortgages back in 1986, so I have some understanding of the nature of the underlying investments that are being made (agency mortgages). That asset itself has what the finance professionals call "negative convexity". In lay terms, that means they can go up just a little in price but can go down a lot. Why? If interest rates decline, the borrower can refinance. Therefore, the investor typically doesn't like to pay a big premium. On the other hand, if interest rates rise, they can sink like a stone as their perceived maturity extends.

The mortgage REITS, which I've included not only invest in this asset that is essentially "short volatility", but they layer on a lot of leverage. They then, as REITS, pay out the vast majority of the spread between their borrowing costs and the mortgage interest. That's how they produce the big dividends.

As I said in the introductory paragraph, this is a strategy that works more often that not. The problem is that when it fails, it really fails. The main issues are the value of the underlying assets and the difference between borrowing costs and the yield on underlying investment. The steeper the yield curve and the lower interest rates, the better it is for producing big fat dividends. More leverage will help too.

 

 

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11 Really Cheap Banks with Downside Protection

There is no doubt that Financials are out of favor, as the sector is down over 4% YTD, the worst in the S&P 500. I understand that big banks continue to have big problems, but what about some of the smaller, well-capitalized banks? It would seem that there are some great bargains in that group, so I set up a screen to try to capture them.

The goal, then, was to identify stocks with stable to rising dividends well above that of the market and with low valuations relative to their assets. The fact that these companies didn't cut their dividend during the downturn and that they are growing their earnings says a lot. Many of these banks have been flooded with deposits at a time when loan demand is slack, potentially creating some earnings leverage as the economy improves.

 

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Rocketing Refiners

The hottest sector in the market is energy, up almost 14% YTD, well ahead of the 5% move in the S&P 500 and more than double the 6% move in the second best sector (technology). The sources of strength are broad, but one of the groups fueling the rally is refiners.

There are three refiners in the S&P 500, and they are up an average of 19.5% despite one being a dog. Smaller refiners are doing even better. Here are the 9 refiners in the Russell 3000: 

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Getting in Front of Major Share Repurchase Programs - 3 Picks

The stock market has turned into a huge spring break bash, and it's only February. Now, I am not surprised with the trends, only the pace. I continue to look for 1500 on the S&P 500 later this year, a call I initially made in early October but reiterated last week when discussing the cheapness of Mega-Caps as well as a month ago when I described the implications of a boom in dividends .

Still, I am blown away by some of the action I saw last week. An insider adds to his position and says he wants to buy Family Dollar (FDO), and the stock soars initially by more than 25%. Timberland (TBL) is selling lots of boots - that's worth a 30% gain after earnings. Weight Watchers International (WTW) jumped 47% on good news last week. The list goes on, but I think you get my point.

While I expressed some caution in my weekly message to my subscribers at Invest By Model about a potential consolidation ahead, the PE expansion I have been discussing is likely to persist all year. It's not about the economy, it's about valuations. As long as the economy doesn't tank, the stage is set for stocks to continue their care-free ways. My advice: Get used to this.

One of the big drivers is that investors are beginning to see the implications of very strong balance sheets. A month ago, I touched on this them when I shared some examples of "high-quality cash-rich companies" that had boosted their stocks with repurchases (Copart (CPRT) and C.R. Bard (BCR) as well as three names that are in my models that I think are likely to do the same. I am revisiting this idea because it is a easily exploited opportunity for investors to take advantage of inefficiencies in the market.

 

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Big Oil Could Keep Fueling Big Gains

Energy is leading the way, just as Industrials surged to begin 2010.  Is it sustainable?

For Energy in the S&P 500 to keep working, it will probably require the biggest stocks to do well. The top 10 stocks by market cap represent 74% of the value of the entire group of 41 stocks in the sector. 2 of the stocks, Exxon Mobil (XOM) and Chevron (CVX) are among the 10 largest stocks in the overall index. Let's take a look at just those 10 stocks:

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