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All Contents © 2018The Kiplinger Washington Editors
By Vince Martin
| July 25, 2017
U.S. stock markets are at all-time highs. That’s great for people who are already completely long stocks, but many investors who are seeking out fresh stocks to buy are struggling to find good deals.
And of course, worries persist that U.S. equities may have run a bit too far, and a bit too fast.
But 2017 hasn’t been kind to every stock in the market. Oil and gas stocks have struggled thanks to low commodity prices. Retail stocks have suffered at the hand of Amazon.com, Inc. (AMZN). Beyond those sectors, many stocks have declined in the face of a resilient, charging market.
Some of those stocks deserve those losses. But some are just biding their time, and perhaps already looking toward next year.
Here are 10 stocks that have been dogs so far in 2017 — but could be the best stocks to buy for big returns in 2018, and beyond.
Prices and data are from the original InvestorPlace story published on July 19, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
2017 Return: -32%
It’s been a long, hard decline for Tractor Supply Company (TSCO), whose stock has fallen by more than 45% from mid-2016 levels, including a 30%-plus drop YTD.
The rural-focused retailer bears some of the blame, as earnings have repeatedly disappointed and same-stores have decelerated. But at the same Tractor Supply has a real niche, and its CUE (consumable, usable and edible) assortment provides some protection from e-commerce threats led by Amazon. Management sees more room for expanding the store count, and uneven weather has impacted results the past few years, particularly in the first quarter.
At the moment, TSCO looks a bit like the baby thrown out with bathwater, as investors flee retail stocks. But Tractor Supply has a real, and established, niche, making it reasonably well-positioned to battle online competitors.
With TSCO trading at just 15 times 2017 earnings, the stock should rebound once the sector finally settles down — which seems likely to happen over the next few quarters.
2017 Return: -5%
In a banner period for chip stocks, industry giant Intel Corporation (INTC) has been left behind. Consider this:
Staid old Intel? It actually has dropped 5% over the same period.
There are some reasons for concern. Nvidia and AMD are targeting the company’s dominance in datacenter chips. Overall growth has been tough to come by, with analysts expecting just a 5% increase in EPS this year.
But as enthusiasm toward smaller players in the traditionally tough chip space wanes — and it will at some point — Intel’s diversified leadership should look more attractive to investors. With Intel trading at under 12 times 2018 analyst estimates, and offering a dividend yield of 3.1%, the pendulum seems likely to swing back toward INTC stock at some point in the near future.
2017 Return: -31%
Xperi Corporation (XPER) was formerly known as Tessera Technologies. In late 2016, IP licensor Tessera acquired audio technology provider DTS in an $850 million deal. The market loved the transaction, bidding Tessera shares up to a post-crisis high.
But in 2017, the bottom has fallen out. A disappointing Q4 report tanked the stock, and even a Q1 beat didn’t stem the declines. XPER now is headed back toward an 11-month low.
The declines of late simply seem like too much. Xperi shares are trading at less than 9 times 2017 operating cash flow guidance — and about 10 times 2018 analyst EPS estimates. The company is about to enjoy $10 million to $15 million in cost synergies, and the aforementioned strength in semiconductors should help legacy licensing deals in that space.
Assuming strength in the sector continues, Tessera should benefit at some point. That point might not come until 2018, but savvy investors should take a long look at XPER now.
2017 Return: -30%
Stocks in the cyclical office furniture industry, including Knoll Inc. (KNL), soared after the election. But in 2017, the cycle has turned against the sector in a big way.
Knoll’s most direct peer, Herman Miller, Inc. (MLHR), is down only 1%. But KNL and the other two majors — HNI Corp (HNI) and Steelcase Inc. (SCS) — all are down by more than 20%. But Knoll is leading the way with a 30% drop.
At some point, the cycle will return — particularly given a reasonably solid macroeconomic outlook. Knoll seems likely to be the biggest beneficiary.
I’ve long thought Knoll was best-in-class in the space, and its operating margins historically have proven that. “Open office” concerns and weak recent growth have hurt the stocks. But Knoll, now trading at 12 times EPS, is priced as if its growth is at a mid- to long-term end. That’s simply too pessimistic. Knoll has had a rough couple of quarters, including a very ugly Q4. But a 3% dividend and a stock price at a 16-month low is an overreaction.
Optimism will return to this small industry, and Knoll — which has had the worst 2017 — could enjoy the biggest rebound.
2017 Return: -9%
The selloff in retail started with mall and/or specialty retailers, but it hasn’t stopped spreading. The retail plague has now contaminated so-called “dollar stores,” including Dollar Tree, Inc. (DLTR).
But as with TSCO, investors seem to be overreacting to the e-commerce threat.
Like Tractor Supply, Dollar Tree does have some self-inflicted wounds. The 2014 acquisition of Family Dollar hasn’t been as successful as the company hoped. Guidance coming out of Q1 in late May disappointed, pushing DLTR stock lower and leading InvestorPlace contributor Larry Meyers to advise investors to avoid the stock. And it’s possible that the turnaround at Wal-Mart Stores Inc. (WMT) has allowed that giant to take back some share from Dollar Tree and rival Dollar General Corp. (DG).
But this is a company that has posted 37 consecutive quarters of same-store sales growth. Q1 earnings per share grew 10% year-over-year, and the company is guiding for an increase on a full-year basis as well (even excluding the impact of a 53rd week).
Here, too, sentiment seems likely to change. And DLTR should gain when that change comes.
2017 Return: -18%
Netgear, Inc. (NTGR) is best known as a manufacturer of consumer Wi-Fi routers. But the company also has a hit with its Arlo Wi-Fi cameras. Arlo sales are soaring, and the company has two more drivers with its Orbi “mesh” Wi-Fi offering and its high-end Nighthawk consumer routers.
Meanwhile, the multiyear headwind from declines in sales to cable providers like Comcast Corporation (CMCSA) is starting to fade. The combination sets Netgear up well for growth, particularly once the company cycles through additional marketing investments this year.
The disclosure of those investments in the Q1 earnings report, along with fears of competition from Alphabet Inc. (GOOGL) offering Google Wifi, have tanked NTGR stock 20% so far in 2017. But margins will improve next year, Netgear retains dominant market share in its key categories, and a roughly 10x free cash flow multiple means the company needs to post basically zero growth to drive upside.
Netgear very well may be one of the best stocks to buy for a 2018 recovery at this point, particularly given margin pressure in coming quarters.
2017 Return: -36%
There’s no shortage of stocks to buy based on an oil rebound: We here at InvestorPlace listed five such picks earlier this month.
One name not on the list was Anadarko Petroleum Corporation (APC).
Anadarko still has room for a rebound — even without $50 oil, as long as investor expectations come back in. APC shares have fallen a whopping 36% so far this year, and now trade right off a 52-week low. It’s a decline that’s simply too much, and it’s a decline that will reverse at some point.
Anadarko’s diversified operations limit some of the “wildcatting” risk seen at smaller producers. Its balance sheet is solid. A fatal accident in Colorado earlier this year has added to APC’s pressure, but its size and the low probability of a material fine mean the stock should be able to manage through that tragedy.
It’s basically all bad news for APC at the moment. But this is a company that can manage a “lower for longer” environment, and is set to benefit should oil prices rebound. Investors will realize that — eventually.
2017 Return: -13%
BankUnited (BKU) has been one of the worst-performing regional bank stocks so far this year. BKU shares have dropped by double digits in 2017, and nearly 20% from early-March levels.
This move doesn’t make a lot of sense.
First-quarter earnings in April looked reasonably solid. The company’s dual markets in south Florida and the New York City area both look attractive at the moment. Major banks have had some weakness after earnings this week, but most have risen this year based on projections of increased interest rates (and thus lending profits).
BankUnited should be benefiting from those rate hikes, and from strong real estate markets. Yet investors have bid BKU down to just 1.3 times book value and about 12 times 2018 analyst estimates. Both multiples look too cheap.
Investors looking for safe yield and/or a cheaper entry into the banking industry will soon see BKU as one of the better stocks to buy.
2017 Return: -26%
Pretty much every gambling-related stock in the market has gone up this year — except for International Game Technology Ordinary Shares (IGT). Three straight disappointing earnings results have sent IGT stock down 40% from late November highs.
But that decline also has left IGT stock at a notable discount to its peers, where optimism reigns. Scientific Games Corp (SGMS) trades above 8 times EBITDA. So does Everi Holdings Inc. (EVRI). And in a sign of how optimistic investors are toward gaming suppliers, EVRI stock has risen more than 250% in 2017 alone. SGMS is up “just” 90%.
IGT obviously needs some operational improvement after the past few earnings reports. And it has a huge debt load: The company is guiding toward net debt of ~$7 billion at year end, after its pending sale of its Double Down social gaming unit. But SGMS and EVRI have similarly leveraged balance sheets, and IGT’s multiple of 6x looks far lower in comparison.
Assuming the sentiment toward the sector is right, and International Game Technology can show some operational improvements as 2017 rolls on, IGT stock should join the party in 2018.
For the most part, I’ve thought a number of food stocks look expensive. But J M Smucker Co. (SJM) looks like a potential exception.
The company’s diversified portfolio — which includes coffee and pet food in addition to its namesake jellies — should give the stock some ballast in an uncertain grocery space.
Meanwhile, a steady decline of late (SJM is down 11% this year) has brought shares firmly into value stock territory. A roughly 15x multiple to adjusted EPS is well below the 20x-plus multiples seen at a number of peers, and implies little growth going forward.
Analyst firm Hilliard Lyons upgraded SJM recently based in part on that new, lower price, and the upgrade makes sense. Investors have left SJM over the past 12 months, but it seems likely they’ll come back over the next 12.
This article is from Vince Martin of InvestorPlace. As of this writing, Vince Martin was long NTGR and had no position in KNL, but has owned shares in the past, and may take a long position in KNL again in the near future.
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