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All Contents © 2019The Kiplinger Washington Editors
By Will Ashworth
| January 17, 2018
The U.S. stock markets hit the jackpot in 2017, with all the major indexes up significantly—the S&P 500 gained 19% over the past year, the Dow Jones Industrial Average was up 25% and the tech-heavy Nasdaq was up an impressive 28%—making year-end assessments by investors a very happy occasion.
Amazingly, the U.S, markets ranked 39th out of 47 countries in 2017, making this past year a relative stinker compared to the rest of the world's stocks.
Why the "down" year?
It's possible that investors have figured out that U.S. stocks are overvalued relative to stocks in other countries. So, while U.S. markets underperformed on a comparable basis, it can always be worse, as Canada demonstrates.
In 2017, Canadian stocks gained just 6% on the year with energy companies providing a significant headwind to better performance. Here in the U.S., the major indexes are much less dependent on energy stocks, hence the higher returns.
Given the perception U.S. stocks are overvalued, how does one make money in 2018?
Buy several of these ten stocks that lost 20% or more in 2017. My bet is that, like the Dogs of the Dow, they will surprise in 2018.
Prices and data are from the original InvestorPlace story published on Jan. 4. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
It's interesting that John Schnatter, the founder and former CEO of Papa John's (PZZA), stepped down toward the end of 2017. Yet, Under Armour (UAA) CEO and founder Kevin Plank had no such plans despite delivering a lump of coal in shareholders' stockings.
Plank deservedly is on a list of "Worst CEOs" of the past year with Under Armour's stock losing half of its value.
In early February, I suggested that Plank should move aside, hiring a more experienced direct-to-consumer retail executive who understands how to sell in an omnichannel world.
A couple of months later I proposed that Under Armour and Lululemon Athletica (LULU) should join forces to deliver a more balanced business regarding men's and women's customer bases.
Personally, I believe both of these ideas are both valid. Furthermore, I see Lululemon's CEO, Laurent Potdevin, as the perfect person to lead the merged organization.
Regardless of whether these two things come to fruition, I believe Under Armour can bounce back in 2018.
Newell Brands (NWL) lost 29% in 2017 as it struggled to integrate the Jarden acquisition into its own business. This past year was the stock's first significant annual loss since 2008 when it saw a drop of 59% due to the economic crisis.
Investors expected that the integration of Jarden would deliver sales growth and higher profits and neither of these has yet to materialize.
Its five-year restructuring process to save $1.3 billion by 2021 has saved $410 million through the end of Q2 2017. Although it's going as planned, debt levels are still relatively high at $10.2 billion or 65% of its market cap. The company is on track to reduce its leverage ratio to 3.5 times or less by the end of 2019.
Newell has become home to a lot of brands that don't have the scale to compete in a global world. Moving to four operating segments: Live, Learn, Work and Play, I see the company fine-tuning its focus in 2018 and beyond.
Newell stock hasn't been this low since 2014. The transformation might be messy, but 2018 should see it turn the corner.
However, if you don't have 2-3 years to wait for it to complete the restructuring, you're best to look elsewhere.
The bankruptcy of Toys "R" Us in 2017 says all you need to know about Mattel's (MAT) past year. Therefore, it probably doesn't come as a surprise to most investors that Mattel stock lost 41% of its value in 2017 and now sits 67% below its five-year high of $48.48.
Mattel's situation has deteriorated to the point that it suspended its dividend in October to save cash and keep the business on a stronger financial footing. It also intends to look to boost its gross margin by focusing on fewer product offerings while cutting staff to lower its operating expenses.
While it's tempting to look to a Hasbro (HAS) buyout to save the day, it's very likely that Mattel's going to have to innovate its way out of the mess it currently finds itself.
None of its major segments are growing, unlike with Hasbro, which has weathered the Toys "R" Us storm far better than Mattel. That said, Mattel's long-term debt is still only 34% of its market cap which isn't outrageous for a company its size.
Don't get me wrong, buying Mattel is a speculative buy at this point. I would wait for the company to announce its Q4 2017 earnings at the end of January before considering a purchase because it's entirely possible it will test single digits before bottoming.
With Barbie, Hot Wheels and Fisher-Price, it has got a reasonable shot at a turnaround.
If it weren't for bad luck, Chipotle Mexican Grill (CMG), would have no luck at all.
I can remember how some analysts and investors were chastising Chipotle for going overboard on food preparation procedures after its E.coli outbreak a couple of years ago. 2017's revisit of food safety concerns put the brakes on any chance for a recovery of its stock price which lost 23% in the past year.
Kyle Woodley, a former InvestorPlace editor and very astute investor, recently picked CMG as his "Best stock for 2018" suggesting profits and revenues are growing far more than most investors realize, and while his pick is speculative given the company's history, the upside seems higher than the downside at this point.
I have to give former CEO and co-founder Steve Ells credit for stepping down in November as Chipotle's chief executive. It's never easy to admit that you're not the one to lead your baby back from the wilderness, but shareholders ought to be thankful that Ells could see that a leadership change was necessary.
Who Chipotle hires as the man or woman to lead the company is critical to bouncing back in 2018. I think the board will make a smart choice with Ells' input and it will be off to the races.
It would not surprise me if a former McDonald's Corporation (MCD) executive were at the top of the list.
At the end of November, I suggested that investors consider buying Sally Beauty Holdings (SBH) after dropping $3 in a month. Since then it's up 18% and should the overall markets continue moving higher early in 2018, I expect SBH stock to do the same.
Sally Beauty's stock lost 29% in 2017, the company's third consecutive year of negative returns; it hadn't had a breakout year since 2013 when it gained 28%. It is due.
Remember, Ulta Beauty (ULTA), one of specialty retail's shining stars, also had a negative year in 2017. The coming year ought to be better for both companies.
While the jury is still out on whether the company can reignite sales, the lowering of the corporate tax rate from 35% to 21% should deliver about 36 cents per share in additional earnings.
The company's biggest weakness has always been its level of debt—$1.8 billion or 75% of its market cap—so I'd look for some indication from SBH management that it is planning to deleverage its balance sheet.
If it does that, given its free cash flow generation, the sky's the limit for its stock.
It wasn't a good year for Bed Bath & Beyond (BBBY), down 44% in 2017. For that matter, it hasn't been a good decade, losing 2% annually for long-time shareholders.
Eventually, the tide's got to turn, doesn't it?
Well, probably not if it keeps delivering woefully poor earnings results like Q3 2017. On December 20, it announced that sales were flat year over year at $3 billion, earnings per share were virtually halved from 85 cents a year earlier to 44 cents this year and comparable sales decreased marginally by 0.3%.
Despite the deterioration in its earnings, the company still generates significant free cash flow. It currently is valued at four times operating cash flow, its lowest level at any time in the past decade and less than half its industry peers.
Yes, the various banners it operates under have seen attrition in both gross and operating margins, yet it's still expected to earn $3 per share in fiscal 2017.
At seven times earnings, there might not be a better value play than BBBY at the moment.
Tanger Factory Outlet Centers (SKT) is an owner of retail real estate focusing entirely on outlet centers. It owns 40 outlet centers in 22 states and another four in Canada. Together, these 44 outlet centers provide 15.3 million square feet for retailers to lease.
Interestingly, the company estimates that there are only 70 million square feet of quality outlet space in the U.S., suggesting Tanger has close to 20% of the country's leasable outlet space.
That's what Warren Buffett would call a wide-moat.
Conservatively financed, it has grown its enterprise value by 7.5% annually on a compounded basis since 2005. Also, it's a prominent grower of its dividend, belonging to the S&P High Yield Dividend Aristocrat Index. In the past three years, it has grown its dividend by 12% annually.
Tanger is an income investor's dream stock.
Since going public in 1993, it's never had an occupancy rate lower than 96%, providing investors with considerable comfort that cash flow isn't going to disappear overnight.
As CEO Steven Tanger likes to say:
"In good times people love a bargain, and in tough times, people need a bargain."
That's what makes its business model so strong.
Trading at levels not seen since 2011, I like SKT's chances in 2018.
I recommended Acuity Brands (AYI) stock on two occasions in 2017.
The first time was in August when I picked Acuity Brands and seven other stocks whose share prices added up to $2,000. Although Acuity is known for its lighting solutions, the company is making a big push into the Internet of Things and while it's early in that expansion, I can see it being just as successful.
In fiscal 2017 (August 31 year-end), Acuity earned $7.43 per share, 12% higher than a year earlier. With very little debt and steady free cash flow, it has the financial flexibility to drive future growth.
At the end of November, I suggested investors buy its stock on the dip around $160. It has since climbed 10% and is poised to move higher in 2018 on strengthening margins.
Long-term, Acuity might be one of the best stocks to buy on a significant downturn in its stock price.
Like a lot of oil-related businesses, Boardwalk Pipeline Partners (BWP) had a dreadful year, down 23%, erasing a significant portion of the gains it made in 2016.
The operator of natural gas pipelines and storage facilities—in 2016, it transported 2.3 trillion cubic feet of natural gas and liquids—has been on a roller coaster ride the past few years. If oil and gas prices don't remain where they currently are, investors can expect continued volatility in its stock price.
However, lower corporate and personal income taxes could result in a more buoyant economy. When people and businesses are more confident, they spend more money. Often, that spending comes in the form of automobile travel, which could put upward pressure on oil prices due to increased demand.
For those who aren't so sure that oil and gas prices can go any higher, you might want to invest in Loews Corporation (L), a holding company run by the Tisch family, which own 51% of Boardwalk's stock.
Over the past five years, Loews' stock has significantly outperformed BWP—4% annually vs. -9%—although neither did anywhere close to the S&P 500.
In June 2017, I suggested that Loews take BWP private. Perhaps it will happen in 2018.
This last one must be considered the "Hail Mary" of the bunch. I don't like General Electric (GE) as a business or a stock because it's squandered so much shareholder goodwill over the past 20 years by being the worst kind of industrial conglomerate, one that's afraid of taking chances and is stuck in some time warp.
CNBC Mad Money host Jim Cramer, someone I generally respect, recently apologized to his loyal viewers for continuing to recommend GE stock despite its ongoing slide.
Cramer feels like GE could get it together under new CEO John Flannery. Therefore, he's still not recommending investors sell the stock. I'm not as convinced. I believe GE's business could be permanently broken.
In August, I predicted that GE stock would remain in the $20s for the foreseeable future. Since then, GE's stock has dropped almost 30% on news the company's problems are bigger than first thought.
That said, any obvious signs of life from GE as we make our way through 2018, should be good for a 5%-10% boost in its share price, perhaps more.
At these prices, GE could very well surprise in 2018.
This article is from Will Ashworth of InvestorPlace. As of this writing, Ashworth did not personally hold a position in any of the aforementioned securities.
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