Dorfman: Big stock winners, losers in S&P 500 Index of 2014
When a stock is up magnificently or down hideously for a calendar year, you know something is going on with the company.
What you don't know is whether the good or bad fortune will persist into the next year.
Here's a look at the biggest winners and losers in the Standard & Poor's 500 Index this year.
The five biggest winners through Dec. 12 are:
• Southwest Airlines Co. (LUV), up 119.8 percent
• Edwards Lifesciences Corp. (EW), up 96.0 percent
• Electronic Arts Inc. (EA), up 95.7 percent
• Avago Technologies Ltd. (AVGO), up 89.9 percent
• Allergan Inc. (AGN), up 87.9 percent
Four of this year's five biggest losers are energy stocks.
The unlucky five are:
• Transocean Ltd. (RIG), down 64.0 percent
• Denbury Resources Inc. (DNR), down 61.1 percent
• Noble Corp. (NE), down 53.1 percent
• Ensco plc (ESV), down 52.7 percent
• Genworth Financial Inc. (GNW), down 49.0 percent
Delphic oracle
The past can't tell us much about what these stocks will do, as my columns on this subject the past two years have demonstrated.
The big winners of 2013 fell nearly 6 percent during the next year, even as the market rose strongly. But the winners of 2012 went on to gain 33 percent from Dec. 17, 2013, through Dec. 12.
The losers, too, have been unpredictable. The ones I wrote about in December 2013 fell another 22 percent. But the 2012 crop advanced 76 percent, helped considerably by a 254 percent gain in Best Buy Co. (BBY).
The eight stocks I recommended in those two columns rose an average of nearly 35 percent, compared to about 21 percent for the S&P 500. The 11 stocks I suggested avoiding returned a little under 8 percent on average.
Bear in mind that my column results are theoretical and don't reflect trading costs or taxes. Past performance doesn't predict future results. And the performance of my column picks should not be confused with that of actual portfolios I run for clients.
Up in the air
I like Southwest and other airlines, which are benefiting from industry consolidation, fuller planes and radically lower fuel costs. Southwest shares at about $41 fetch 28 times recent earnings, which is a lot. But the valuation is only 15 times estimated earnings for 2015.
In the airline industry, I believe Southwest excels at fleet planning, fuel cost management and customer service. However, I do prefer a couple of other airline stocks to Southwest, mainly on valuation grounds. For clients, I own Alaska Air Group Inc. (ALK) and Delta Air Lines Inc. (DAL).
Several of this year's winners are good companies, but their stocks are too pricey for me. That applies to Edwards Lifesciences, a heart-valve maker; Electronic Arts, a video game company; Avago, a Singapore-based semiconductor company; and Allergan, a pharmaceutical company. Each sells for a hefty multiple of next year's estimated earnings.
Energy patch
The four energy stocks on the losers list include three drillers: Transocean, Noble and Ensco. I believe that big profits await the investor who can catch the bottom in these stocks, but I estimate that the bottom is three to nine months away.
The price of a barrel of oil has declined 43 percent from last summer through Dec. 12. Oil companies will be ordering fewer drilling projects and canceling some that are under way. So the drillers may look cheap based on recent earnings but could be expensive based on possibly putrid 2015 earnings.
Denbury Resources is an oil and gas company based in Plano, Texas, that uses carbon dioxide to loosen and extract oil and gas from its fields. (It owns a large natural carbon dioxide deposit.) With the stock selling for $6.40, down from more than $35 in 2008, I consider it a buy.
That's not to say that Denbury will have smooth sailing. Analysts expect earnings to be down about 33 percent next year, and the reality could be worse. But with the stock selling for only six times recent earnings and 0.4 times book value, I think the risk-reward ratio is favorable.
Long-term care
The fifth big loser, Genworth, offers long-term care insurance, life insurance and mortgage insurance, plus some other financial products. It has been running up big losses in the long-term care arena, and analysts have questioned whether its loss reserves are big enough.
The stock is cheap, but I believe Genworth has hitched its star to a product — long-term care insurance — whose rationale I question. Insurance works best in protecting against relatively infrequent occurrences that nobody wants, such as death or car accidents. It doesn't work as well in dealing with high-frequency events that people actually seek out, such as dental care or nursing home care.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston. He can be reached at jdorfman@dorfmanvalue.com.
