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Ben Carlson is one of my favorite finance bloggers. Recently, Carlson lamented about how the bull market of almost nine years has made it extremely difficult to find bargain stocks to buy. As a result, dumpster diving has become virtually impossible.
The trick, according to Carlson, is to figure out how much of a potential bargain’s bad news is priced into its current valuation. That’s no easy task.
“When dumpster diving for beaten-down shares, you must be able to understand how far divorced fundamentals have become from investor expectations,” Carlson told Bloomberg recently. “While there were bargains galore in early 2009, late 2011 and even early 2016, if you want to find value in these markets, you have to go dumpster diving.”
Further, he adds, “you have to expect that anything going down big has to come with some baggage.”
Carlson has laid out six industries and asset classes that have performed miserably over the past three years. Here are seven beaten-down stocks to buy now, at least one from each of them.
Prices and data are from the original InvestorPlace story published on September 21, 2017. Click on ticker-symbol links in each slide for current prices and more.
By Will Ashworth
| October 2017
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Industry/asset class: Retail
Almost six years ago to the day, I came down hard on Bed Bath & Beyond Inc. (BBBY) by suggesting the home furnishing company’s decade-long run of beating the S&P 500 was drawing to a close due to lagging e-commerce.
“This is my biggest argument against Bed Bath & Beyond. In 2010, its revenues were $8.8 billion, yet its online sales totaled just $88.7 million and grew by only 3%. Those transactions represent just 1% of revenues,” I wrote on Sept. 15, 2011. “Whoever’s in charge of their e-commerce either needs replacing or given a good pep talk. These numbers are truly embarrassing.”
Since then, Bed Bath & Beyond’s stock is down over 60%, compared to the SPDR S&P 500 ETF Trust (SPY) which is up 116% over the same period. Down 45% year to date through Sept. 15, Bed Bath & Beyond is working on a fourth consecutive losing year and its fifth out of six since I recommended investors sell.
Back in 2011, it had no debt and didn’t pay a dividend. Today, it pays 15 cents a quarter, which is the good news, but it also has $1.5 billion in long-term debt as a result of a string of acquisitions that have added little to the bottom line, with operating margins half what they were five years ago.
However, recent quarters have shown progress on the omnichannel front, and given it still makes money, it might just be the bargain-basement retail stock to own.
Industry/asset class: Grocery Stores
Is there a grocery stock that has gotten pummeled more than Kroger Co. (KR) in 2017?
I highly doubt it.
The good thing about grocery stores is eating never goes out of style. Our tastes might change, our habits might change and our disposable dollars might change, but our need to eat remains.
Even in Kroger’s worst year over the past decade — fiscal 2011 when its operating margin was just 1.4% and operating profit was $1.3 billion on $90.3 billion in revenue — it still managed to earn 51 cents per share while generating 64 cents per share in free cash flow. That’s 125.4% of earnings.
Flash forward to today, and its operating margin’s around 3% on $115.3 billion in revenue. Unfortunately, despite higher margins and sales, it has to put more money into its business to keep pace with the Amazons of the world.
However, Kroger’s management has done an excellent job building its private label Simple Truth business, which now represents $1.7 billion in annual revenue and is a growing part of its overall $16 billion natural and organic foods business.
By most financial metrics, KR stock is cheaper than it has been for some time. There’s plenty of room at the dinner table for Kroger.
Industry/asset class: Movie theaters
Despite all the negativity surrounding the movie industry in 2017 — some of it real, some of it imagined — investing in companies that show the movies rather than those making them seems to be a better investment in the long term if you ask me.
Back in September 2013, I recommended investors forget about the Syrian conflict, which was wreaking havoc with the markets, and invest in Cinemark Holdings, Inc. (CNK), a movie theater chain that has screens in both the U.S. and Latin America.
Since recommending Cinemark, it’s up 39.6% through Sept. 18, almost 18 percentage points greater than General Electric Company (GE), which isn’t nearly as constrained by content as Cinemark is.
Bad movies equal fewer people which results in lower revenue and profits. It’s that simple.
However, despite a poor year from the studios, Cinemark managed to hold its business in check. In the quarter ended June 30, its concession revenue per patron grew by 8.9% to $3.78 while the average ticket price increased 3.7% to $6.48. As a result, it increased adjusted EBITDA by 1.4% to $170.7 million despite revenue growth of just 0.9%.
Cheaper than it has been since April 2016, CNK stock provides investors with good bang for their buck.
Industry/asset class: Restaurants
In July 2012, Darden Restaurants, Inc. (DRI) acquired Yard House for $585 million, an acquisition I thought did an excellent job adding to the restaurant operator’s lineup of concepts. With Darden’s operational finesse, I believed that Yard House would become a billion-dollar brand and in the process leave BJ’s Restaurants, Inc. (BJRI) in the dust.
Well, over the past five years, Darden has been able to deliver a 13.4% annual return for shareholders while BJ’s has lost a disappointing 7.6% annually since I wrote about the Yard House acquisition.
Not much good has happened in recent years.
The big problem for BJ’s, whose average check was about 35% less than Yard House, is that much like retail, consumers abandoned the middle for higher-end and lower-end restaurant chains and it has yet to win them back.
Again, like Bed Bath & Beyond, BJ’s Restaurants is still making money and using free cash flow to buy back shares. Since April 2014, it’s repurchased approximately 25% of its stock, which is a better use of its cash flow than buying another restaurant chain.
Industry/asset class: Energy
The Tisch family are value investors. That’s all they know.
Since the beginning of 1966 through the end of 2016, Loews Corporation (L) stock has delivered a compound annual return of 17%.
However, the past decade has been a tough one, lowering the return considerably from what it might have been had L stock not gone sideways.
It owns 53% of Diamond Offshore Drilling Inc. (DO), a firm whose stock price and business have been severely hampered by a move by the big energy companies from offshore drilling to shale, a problem that might not go away for some time.
And that’s what makes Loews so attractive.
“Annual oil demand is expected to continue to grow at slightly more than 1 million barrels per day over the next decade and a half,” Diamond Offshore’s 2016 annual report stated. “Stacked against conservative estimates of production decline, the industry will likely need to find and develop approximately 40 million barrels per day of new production. Onshore, including unconventional shale, cannot fill this gap alone.”
There will come a day when offshore oil production moves from bust to boom, and when that happens shareholders of Loews will benefit in a big way.
You could buy Diamond Offshore stock directly, but I believe owning Loews is a more prudent way to bide your time.
With a bunch of new initiatives under way, including the delivery of food and alcohol, it’s got a shot at getting off the restaurant trash heap, but it’s not going to be easy.
Industry/asset class: Commodities
The merger between two of the world’s biggest agricultural companies received the blessing of the Canadian Competition Bureau on Sept. 11.
Potash Corporation of Saskatchewan (USA) (POT) and Agrium Inc. (USA) (AGU) are up 8.5% and 8.1% respectively since the merger got the green light.
Potash shareholders will receive 0.4 share in the new company to be called Nutrien for every share they currently hold in Potash while Agrium shareholders get 2.23 Nutrien shares for each Agrium share.
Overall, Potash shareholders will own 52% of Nutrien with Agrium shareholders holding the remainder. Together, Nutrien will have $20.6 billion in annual revenue and an enterprise value of $36 billion.
While analysts are skeptical that the merger provides any value for investors, the fact that Potash’s stock is down 10.3% annually over the last ten years suggests that buying its stock before the merger is a better idea than buying Agrium, whose shares have fared far better over the same period, up 9.4% annually.
A bet on Potash at this point is a gamble that the naysayers are wrong about Nutrien’s prospects.
Industry/asset class: Movie Theaters and Hotels
By far the smallest of the seven beaten-down stocks in this article, Marcus Corp (MCS) understands hospitality.
Based in Milwaukee, Marcus has been in business since 1935, when Ben Marcus bought his first movie theater in Ripon, Wisconsin. Since then, it’s expanded the theater business — it has 895 screens at 69 theaters in eight states — as well as moving into the hotel business where it owns and manages 19 properties in 10 states.
It continues to grow its theater business through a combination of acquisitions and new builds. Over 50% of its existing locations were added through acquisitions in the Midwest.
On the hotel side of the business, it owns or manages approximately 5,000 rooms which generate 36.5% of the company’s overall revenue. Over the past six years, Marcus’s invested $90 million improving its hotels. It also continues to push for new management contracts to operate a more asset-light business model.
Year to date, MCS stock is down 15.2%, considerably below the performance of the S&P 500, which is up around 12% in the same period.
It has been hit by the downturn in movie content to a much greater extent than Cinemark given its smaller scale. Once the studios start delivering better content, you can bet Marcus will move higher once more like a slingshot.
This article is from Will Ashworth of InvestorPlace. As of this writing, he held none of the aforementioned stocks.
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