Casualty List ekes out gain yet again
An old stock-market saying warns, “Don't try to catch a falling knife.”
Oh really? I've had pretty good luck buying stocks when they were down sharply. In this column, my main vehicle for recommending fallen stocks is the quarterly Casualty List, which began in 2000. The one you are reading is the 45th one.
One-year results can be calculated for 41 of the lists. Including reinvested dividends, my Casualty List picks have averaged 23.86 percent in 12 months, compared to 9.22 percent for the Standard & Poor's 500 Index.
The Casualty List has beaten the S&P 27 times out of 41 and produced a profit 30 times.
The latest victory was a narrow one. The Casualty List from last July climbed 24.9 percent, just edging out the S&P 500, which returned 24 percent.
Scorecard
My best recommendation from a year ago was Freeport McMoRan Copper & Gold Inc. (FCX), which rose 35 percent from July 2, 2013, through June 27, 2014. I own this stock for a few clients.
Myr Group Inc. (MYRG), a Rolling Meadows, Ill., company that makes electrical transmission equipment, logged a 32 percent gain. HollyFrontier Corp. (HFC), a refiner that I own for most of my clients, was up 18 percent, including dividends.
My worst performer was Lindsay Corp. (LNN), a maker of irrigation equipment, which was up 13 percent.
Bear in mind that the performance figures for my column recommendations are hypothetical and don't reflect trading costs or taxes. Past performance doesn't predict future results. And the performance of my column recommendations shouldn't be confused with the returns I earn on clients' portfolios.
Here are four new selections — stocks that were slammed in the fourth quarter — and that I think have potential to bounce back.
Coach
Coach Inc. (COH) fell 30 percent in the second quarter through June 27. The upscale women's accessories chain, which enjoyed success for many years, suffered revenue and earnings decline in the March quarter from the same quarter a year ago.
Same-store sales in the United States dropped close to 14 percent, and the company said it will close 70 underperforming stores.
To maximize revenue, a business wants to sell more units of a good or service at higher prices. Suddenly, Coach was selling fewer units at lower prices, thanks partly to increasing reliance on outlet stores.
I think the management team is smart and will pull out of this nosedive. The company still enjoys good profitability. With the stock at 11 times recent earnings, I think it's a buy.
United Community
United Community Banks (UCBI) of Blairsville, Ga., is the third-largest bank holding company in Georgia and does business in the Carolinas and Tennessee. It has just over 100 branch offices. Its stock dropped 16 percent in the second quarter through June 27.
The drop occurred despite the fact that the company recently restored its dividend payment, which had been suspended since 2008. The second-quarter drop followed (and reversed) a spike in March. I believe the bank is sound and the stock will rebound.
Geospace Technologies
Geospace Technologies Corp. (GEOS), mentioned recently in this column, is a Houston-based maker of equipment to explore and monitor oil and gas reservoirs. Its stock fell 19 percent as investors worried about the pending expiration of a big contract with Statoil of Norway and uncertainty surrounding another large contract.
I admit the stock is risky, but it's my kind of risk. The company has shown good earnings growth during the past five to 10 years. It has specialized expertise. And I believe the pace of drilling — worldwide and in the United States — will accelerate during the next three to five years.
Even if there aren't disruptions of oil flows from the Mideast (which there may not be), I see a need for more drilling, because oil and gas are increasingly found in difficult locales, and the new horizontally drilled sites deplete faster than the old vertical ones.
Ultra Clean
Finally, I recommend Ultra Clean Holdings Inc. (UCTT), down 34 percent in the quarter through June 27 on an earnings disappointment. I attribute the drop to the fact that investors had very high expectations before the earnings announcement — not to serious flaws in the company.
Based in Hayward, Calif., the company makes “precision robotics systems” and gas delivery systems used mainly to manufacture semiconductors. Earnings in the March quarter disappointed analysts but didn't seem especially bad to me. The company lowered its revenue estimate going forward, but not dramatically.
This is a company that has grown its earnings at a 15 percent clip during the past five years. With the recent decline, it is selling for 14 times earnings and only 9 times analysts' estimate of 2015 earnings.
John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at jdorfman@thunderstormcapital.com.
