Stocks Back from the Dead
Every so often there's a strange-but-true story about a corpse that twitches just before it's to be shipped to the morgue. This can also happen with investments. But when you see such a phenomenon in the world of stocks, you're not having a nightmare. In fact, you're witnessing an opportunity to, er, make a killing.
A bunch of stocks have risen from the grave this year. Heavyweights such as Bank of America and General Electric, both members of the Dow Jones industrial average, as well as many homebuilders, retailers and manufacturers, have not only cheated death but have seen huge run-ups in their share prices since the stock market bottomed last March. Many dropped to the single digits and terrorized their shareholders with losses of 80% or more from their peaks of the past several years before reversing course.
If you're a bottom fisher, you may have already profited from this ghoulish action. But most of us aren't gutsy enough to risk precious savings on a stock that's falling toward zero. The question you should be asking yourself now is whether a share of something such as specialty-vehicle maker Oshkosh (symbol OSK) -- which traded at $66 in 2007, fell below $4 in late 2008 and closed at $26.62 on August 24 -- has already overshot reasonable value, given the company's and the economy's prospects. If it has, it's foolish to buy more shares no matter how far the price is below the prior peak.
All of the ten stocks below fit the Oshkosh pattern. Some are worth considering and some you should avoid, but this much is for sure: At least ten times as many stocks are also back from the dead. Our judgments are based on the assumption that the recession is over but that the recovery will be restrained by high unemployment, continuing retrenchment on the part of debt-laden consumers and the possibility of higher long-term interest rates over the coming year.
Aegon (AEG). Peaked at $22 in May 2007, bottomed at $2.25 in March. Latest price, $7.55 (All prices are as of the August 24 close.) Recommendation: Buy
Aegon, a Netherlands-based life insurer and pension manager, just raised 1 billion euros in a stock offering priced at the equivalent of $7.50 a share. Like many financial companies, Aegon has lost money for four straight quarters, and Standard & Poor's says it is still an "unstable entity with a great ability to surprise" in a bad way. But the company is trying to become less reliant on the U.S. and the U.K., and it has moved into faster-growing markets, such as India and Mexico. This makes Aegon sort of a back-door emerging-markets play. It was a steal at less than $3; at the current price, it's still worth a shot despite the absence (for now) of earnings and dividends.
CarMax (KMX). Peaked at $29 in January 2007, bottomed at $5.76 in November 2008. Latest price, $16.55. Recommendation: Buy
Warren Buffett recently sold three million of the 12 million CarMax shares Berkshire Hathaway had owned, but don't let that deter you; Buffett's been wrong as often as he's been right lately. Shares of CarMax, which mostly sells used vehicles, collapsed because of concerns that neither it nor its customers could get adequate financing; in fact, CarMax's captive finance operation swung from a profit to a loss in early 2009.
But that should be less of a problem as credit eases. The bulge in new-car sales stemming from the "cash for clunkers" program may hurt CarMax's results this quarter, but that should be a temporary setback. This is the best-run company in a decent industry. There's no reason it shouldn't be a good investment again.
CB Richard Ellis (CBG). Peaked at $43 in July 2007, bottomed at $2.34. Latest price, $ 11.68. Recommendation: Buy (speculative)
This commercial real estate broker and property manager is an aggressive alternative to investing in real estate investment trusts. With Ellis, you forgo dividends for a shot at high growth. CBRE has what's known as earnings leverage. If the price and demand for office space, warehouses and financial back-office facilities come roaring back -- as commercial realty did in the middle years of this decade -- CBRE, which carries a lot of debt, should do especially well.
Your guess is as good as anyone's when this will happen, though, so for now this is a trading stock. Buy on dips, which today means at less than $10. If all goes well, the stock could hit $20 a year from now.
Cemex (CX). Peaked at $41 in June 2007, bottomed at $3.94 in March Latest price, $12.68 Recommendation: Buy
The Mexican producer of cement and other building materials has been a Woolworth stock this year: It goes to $5 or so, and then to $10, then back to $5, and back to $10 again (and, finally, beyond). Although Cemex is based south of the border, it needs to see a rebound in U.S. construction to regain its reputation as a growth company (albeit one in a cyclical industry).
I confess I recommended it at $27 in January 2008, and that looked great for all of six months before the economy began to weaken. So maybe it's just wishful doubling down to say that buying at $12 is okay. But if construction crews in Texas, California and other places ever get back to work, Cemex's stock should break out of its current range.
DR Horton (DHI). Topped out at $31 in February 2007, bottomed at $3.79 in November 2008. Latest price, $12.67. Recommendation: Avoid
That homebuilder stocks shone during the current rally should come as no surprise. The stocks had been priced not just for a recession but for catastrophe. If this turns out to be a V-shaped economic recovery, the 200-plus% gain in Horton's shares might be not only defensible, but too little. Given the likelihood of a sluggish economic rebound, however, the advance in the shares of this national homebuilder more than offsets the earlier plunge.
Goodyear (GT). Peaked at $37 in July 2007, bottomed at $3.17 in March 2009. Latest price, $17.03. Recommendation: Avoid
The tire maker, which has struggled in good and bad economies, lacks an obvious growth strategy. Plus, its finances are weak, so investors will never pay up for the stock. Buy the tires and admire the blimp, but try another stock.
International Paper (IP). Peaked at $42 in July 2007, bottomed at $3.93 in March. Latest price, $ 20.88. Recommendation: Avoid
The future of paper is dim. The stock soared in part because IP is the best of a weak industry. Still, IP cut its dividend by 90%, using the cash it saved to buy back expensive debt. The company's huge land holdings are ripe for a turnaround in value, but IP has a history of recurrent write-downs, offers little dividend yield, there's no evident growth plan. IP smells like a value trap.
Masco (MAS). Peaked at $37 in February 2007, bottomed at $3.64 in March. Latest price, $14.36. Recommendation: Buy
A typical cyclical manufacturer, Masco got hammered by investors who hated anything related to housing or construction. But Masco has a good balance sheet and an excellent earnings history during good economic times. It's not worth its peak price, but it could easily earn $2 a share again. When that happens, the stock should go much higher than $14.
Oshkosh (OSK). Peaked at $66 in July 2007, bottomed at $3.85 in November 2008. Latest price, $26.62. Recommendation: Neutral
From November's low, this is already a six-bagger, so there's reason to be concerned that the stock has rebounded too fast, too far. Then again, Oshkosh just completed a secondary stock offering for $25 a share -- pretty amazing for a company whose stocks and bonds were crashing six short months ago. All's well now with the credit folks, too. The question is whether Oshkosh's civilian businesses, such as garbage trucks and fire engines, will improve as the economy does. Unless they do, the stock is no longer enough of a bargain to warrant a buy.
Williams-Sonoma (WSM). Peaked at $34 in July 2007, bottomed at $4.35 in November 2008. Latest price, $ 14.56. Recommendation: Buy
The seller of upscale kitchen tchotchkes and other home furnishings is a better company than most specialty-store operators, although all retail stocks are somewhat speculative nowadays. It carries little debt, pays a safe dividend, and has fair sales trends and weak competition. If spending ever resumes on the kind of stuff you see at Pottery Barn, one of the company's concepts, the stock can keep up the momentum. Wait for the earnings report due out August 26 for confirmation, though. If there are any shocks, wait for the stock to take the usual two-day pounding. Then buy.