Dorfman: Cummins, Deckers among candidates for January bounce

Kick them when they're down.

That's what investors do to losing stocks at this time of year.

It's a tax-driven phenomenon. Suppose you had losses in Micron Technologies and Hewlett Packard Co., as I do in portfolios I manage for clients. And say you had realized substantial gains during the year, as I did in United Therapeutics (UTHR) and NetEase (NTES). What would you do?

Not wanting to cost my clients unnecessary capital-gains taxes, I do what most money managers and investors do in the fourth quarter — sell some losers in taxable accounts to offset the tax on the gainers.

The effect of this seasonal tax selling is to accentuate the weakness in stocks that lost ground in the first three quarters of the year. That phenomenon can create some bargains, leading to a January rebound in stocks that have been punished excessively.

Bounce candidates

To try to determine what stocks are likely to bounce in January 2016, I used Ned Davis Research software to identify issues that:

• Are down at least 15 percent in the 43 weeks through November 13.

• Are down at least 5 percent in the 30 days through November 13.

• Sell for 15 times earnings or less.

• Have debt less than stockholders' equity

About three dozen names popped up, from which I have selected four to recommend.

Cummins

Cummins Inc. (CMI), formerly Cummins Engine, is best known for manufacturing diesel engines. Its long customer list includes Paccar, Daimler, Ford, Volvo and many others. The company has a long history of profitability and boasts a strong balance sheet.

While the Standard & Poor's 500 Index sells for 23 times earnings, Cummins sells for just 11 times earnings, reflecting sluggish growth the past three years. While the U.S. economy is doing well, economies in Europe are stalled out, and many emerging economies are sputtering, including China's. Cummins gets more than half its revenue outside the United States. In a year or two, I think many of these countries will be chugging along better, at which point I expect Cummins's stock price to be a lot higher than the present $99.

Pulte Group

Housing starts in the United States hit bottom during the financial crisis at about 500,000 a year. Today, they are running about a 1.2 million annual pace, still a far cry from the 2 million-plus totals during the boom times. I think homebuilders are on the comeback trail, but investors are skittish, remembering the housing bust of 2008-2011.

That's why you can buy shares in Pulte Group Inc. (PHM, formerly Pulte Homes) for only 13 times earnings, even though revenue has been growing at a 13 percent clip the past three years. The stock price at about $17 has quadrupled from the 2011 bottom but is a far cry below the $46 peak achieved in 2005.

Western Digital

Skeptics say that hard disk drives are obsolete, but guess what media are used to store much of the humongous trove of date accessed through the “cloud?” That's right, large hard disk drives. Western Digital Corp. (WDC) is one of only two major companies (the other being Seagate Technology) that manufacture hard disk drives worldwide.

It's true that hard disk drives are being replaced by solid state drives in many applications. But through its pending acquisition of San-Disk Corp. (SNDK), Western Digital will have a decent toehold in solid state drives as well. Western Digital stock is down about 39 percent this year and sells for 11 times earnings.

Deckers

Deckers Outdoor Corp. (DECK) , the maker of Uggs boots, sports an enviable long-term growth record. Today, growth has slowed, and the stock has been punished with a 48 percent loss this year.

Warm weather (2015 may end up the warmest year on record in the U.S.) has hurt sales of winter gear, including boots. Buying Deckers shares on previous growth scares has proved lucrative, and I suspect the same will be true this time.

Past results

From 2000 to the present, I've written a dozen columns recommending some January rebound candidates. The average one-year return has been 8.9 percent, compared to 7.5 percent for the Standard & Poor's 500.

Last year's crop failed, however. As a group, they dropped 28 percent, the worst offender being Pier 1 Imports Inc., which I thought would advance because of a strong dollar. It plunged 52 percent.

Disclosure: I own Pulte Group and Western Digital personally and for most clients. I own Hewlett-Packard and Micron for many clients, Cummins and United Therapeutics for a few clients. I have no positions in the other stocks mentioned above.

John Dorfman is chairman of Dorfman Value Investments in Boston and a syndicated columnist. He can be reached at jdorfman@dorfmanvalue.com.