March 2009 marked the bottom of the brutal bear market. But surveys show as many as half of investors believe the bear is on the verge of returning, even though the Dow Jones industrial average has rebounded. At 11,416 as of October 11, the index is 74% above its March 9, 2009, close of 6,547, the lowest for the year and the generally-acknowledged turning point for the stock market. (The economy, of course, has continued to struggle ever since).
One reason for this fear of a new bear is this surprising fact: Despite the recovery of the overall market, the shares of many well-known companies are now changing hands for less (or just slightly more after the weeklong rally in early October) than their depressed prices of two and a half years ago.
George Putnam, author of The Turnaround Letter, has long experience looking for rebounds. He identifies ten such beaten-down investments he believes are worth poaching before they regain even more value. Each company is dealing with a business or legal or regulatory problem (or several problems), but Putnam thinks all are fixable and sees no reason to wait and see if the shares’ prices will get even lower. You do have to be prepared to sit through further losses and turbulent markets while you wait for the companies’ businesses to improve or for them to settle their legal issues.
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I have three additional ideas, which I’ve included at the end. First, though, here are some thoughts on Putnam’s picks:
Computer Sciences Corp. (symbol CSC)
Price as of October 11, 2011: $30.60
Price as of March 2009 low: $31.23
Computer Sciences, an outsourcing and data-services company, gets one-third of its revenues from the federal government, which is either good or bad, depending on what happens with the budget. CSC does renew 80% of its clients, and that’s a good thing. The competition, though, is brutal.
Dean Foods (DF)
Price as of October 11, 2011: $9.94
Price as of March 2009 low: $19.02
Dean Foods is the largest producer of milk and dairy products in the U.S. The trouble is massive debt Dean took on to buy other businesses. Though the balance sheet is ugly, Putnam believes the debt load is manageable.
Dun & Bradstreet (DNB) (DNB)
Price as of October 11, 2011: $63.34
Price as of March 2009 low: $66.59
There’s been little or no growth at D&B for a long time. But at least this business-records firm, which lenders use when they are checking credit, remains decently profitable. A general pickup in business trends around the world would help D&B resume growth.
Exelon (EXC)
Price as of October 11, 2011: $42.49
Price as of March 2009 low: $38.91
Exelon’s miserable return -- it was flat before the last few days of gains -- is a mystery because electric-utility stocks have had a good run and analysts and fund managers often call this one of the best.
The latest hassle is a holdup in plans to take over Constellation Energy, a Maryland utility, and become the second-largest gas and power provider in the U.S. Exelon’s huge investment in nuclear power is also an issue at times, such as during the worst weeks of the accident in Japan.
While you wait for a recovery, though, you get a 5% dividend yield.
Monsanto (MON)
Price as of October 11, 2011: $74.58
Price as of March 2009 low: $69.71
Monsanto makes genetically modified seeds and crop-protection chemicals. It was a monster growth investment from 2000 through 2008, rising more than 700%. The stock has since stagnated for a bunch of reasons, including price wars and the availability of low-cost Chinese herbicides. The company has barely made money during this weak economic recovery. And now it says it’s going to restate its financial statements for 2009, 2010 and 2011. Monsanto’s research and development arm must now protect its long-term scientific advantage.
Morgan Stanley (MS)
Price as of October 11, 2011: $15.67
Price as of March 2009 low: $16.16
This is one of many financial companies whose shares keep sliding in the face of global financial and economic uncertainty and trade well below the book value of the business. Currently, it’s the European debt mess. But Morgan Stanley isn’t failing, and its shares have every reason to rebound if and when the news from Europe gets better -- or at least until the next financial disaster.
Gilead Sciences (GILD)
Price as of October 11, 2011: $40.42
Price as of March 2009 low: $43.71
Gilead Sciences is the leader in HIV and AIDS drugs and is a cash-rich, global, growing and profitable company. The shares have been under a cloud due to a Justice Department investigation of product quality and manufacturing practices. There’s also general investor dissatisfaction with the pharmaceutical industry. But Putnam doesn’t think the government probe is a big problem. And given that more than 80% of new HIV patients rely on Gilead drugs, the outlook is solid. The stock market is probably impatient for a lucrative drug breakthrough as it is with the rest of the industry.
Pulte Group (PHM)
Price as of October 11, 2011: $4.40
Price as of March 2009 low: $8.08
The housing market hasn’t recovered from the mortgage mess and recession, and may never return to what it was, but Putnam says to bet on Pulte, the nation’s largest homebuilder. It bought some weakened competitors but did so with a pile of debt, so anything could happen here, including a total loss. But if any builder can survive and lead the industry back to at least moderate prosperity, this is the one.
SAIC (SAI)
Price as of October 11, 2011: $12.75
Price as of March 2009 low: $17.00
SAIC provides scientific and engineering services and gets 75% of its sales from the U.S. Department of Defense. Never mind that Congress seems poised to cut the military budget, and that uncertainty has caused the shares to plunge since May. All defense contractors’ stocks are depressed, but SAIC’s series of negative earnings restatements hasn’t helped it, either. The favorable signs are that SAIC’s earnings are still growing and the bears may be overreacting to the budget turmoil in Washington.
Vulcan Materials (VMC)
Price as of October 11, 2011: $31.36
Price as of March 2009 low: $32.35
The depression in construction has also struck the shares of Vulcan, a big provider of building materials such as concrete, sand and gravel. But Vulcan’s size and geographic reach, plus its solid base of public-works contracts, make the company a good way to gamble on a rebound in construction, including the proverbial highways and bridges.
My 3 Contrarian Ideas
Archer-Daniels-Midland (ADM)
Price as of October 11, 2011: $26.85
Price as of March 2009 low: $24.55
This stock was flatter than the others on this list since the market bottomed in 2009 and now it’s up a hair, but it still looks cheap. ADM is a major processor of oilseeds, corn, and wheat for food, animal feed, ethanol, and much more. As world demand for food and livestock increase, ADM ought to benefit. The question is whether ADM can bolster its poor profit margins. Sales are growing strongly, but earnings are not.
Teva Pharmaceutical Industries (TEVA)
Price as of October 11, 2011: $39.12
Price as of March 2009 low: $41.65
Israeli generic drug colossus Teva has seen its huge gain prior to the recession of 2008 partly disappear for several reasons, including strong competition for some of the drugs Teva developed itself, such as one for multiple sclerosis. Teva is a rich and talented company, though, and it is taking steps to shore up its future profits. It is still on a global shopping spree, buying other drugmakers and forming joint ventures in Brazil, Germany, Japan and Russia.
Transocean (RIG)
Price as of October 11, 2011: $50.25
Price as of March 2009 low: $48.40
Ever since the BP oil spill in 2010, shares of Transocean, a provider of oil and gas drilling rigs, have been under pressure. Transocean is still dealing with equipment-maintenance issues following the spill and faces possible legal liabilities. But the energy business goes on, and Transocean is poised to prosper from more intense undersea exploration. Contract rates for drilling are heading up because of a shortage of deep-water drilling rigs, and the company owns the world’s largest offshore-drilling fleet.
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