Laggards to Leaders?

06/11/2014 10:00 am EST

Focus: STOCKS

Tom Petruno, of Kiplinger's Personal Finance, looks at stocks that have missed out on the market's run since 2011; from tech to footwear, and mattresses to weight loss, he highlights four such laggards that hold the promise of returning to favor.

Steven Halpern: Our guest today is Tom Petruno of Kiplinger's Personal Finance. How are you doing today, Tom?

Tom Petruno: Great.

Steven Halpern: In your latest article for Kiplinger's, you look to out of favor stocks in search of bargains. Can you tell us a little about the approach you use?

Tom Petruno: Well, what I was looking for was stocks that are trading well below their 2011 peaks. In other words, they've completely missed the latest leg up in the bull market and that's not necessarily a reason to buy, obviously, because often stocks are down for a good reason.

But I wanted to see, in there, if there were any stocks that were left behind and actually had intriguing prospects looking forward. So that was—the main approach was to say, “Well, what's trading well below 2011 highs while the rest of the market has advanced pretty sharply since then?”

Steven Halpern: You point out that tech investors, in general, have done well in these recent years but not so much for those who've owned Broadcom (BRCM). What's the story here?

Tom Petruno: Well, Broadcom is a fantastic chipmaker and it is a company that has been around for decades. The market's problem with Broadcom is it decided a few years ago to try to take on Qualcomm, its arch rival in so-called baseband technology, and that's the technology at the heart of wireless phones.

Basically, when I looked at this, I thought the reason the stock has been distressed is they've been spending a lot of money on this and a lot of analysts and money managers believed they could not win the war against Qualcomm. So, what I said in the article, which was published in late May, was that this could be win win.

If they keep this baseband business because they really think they're going to make a go of it, it could be great for future revenue and earnings. If they get out of it, and basically say we can't win this war, they would save a huge amount on future research costs and could push their resources toward other areas of the chip business.

In fact, in the last couple weeks, what they announced was that they're giving up on baseband business. So when I was looking at the stock it was around $31. It's already up to $38, just in the last few sessions, because what they did, in fact, was decide we can't win this war, let's put our resources elsewhere.

Steven Halpern: And you also looked towards footwear maker Decker's Outdoor (DECK). What do you see happening there?

Tom Petruno: Well, Decker's—this is the company that makes the UGG boots. Very popular boot with a lot of women, in particular, and their brands, generally, are pretty upscale. What happened with them was the revenue really, sort of, stalled out on UGG.

This was in 2012, and the market started to think that UGG was just a flash in the pan kind of thing and people were giving up on it. So I was looking at this thinking, well, this is a pretty big company, and there's no reason to think that UGG is a brand that is going away in a hurry.

In fact, what was happening was the company was deciding to really begin pushing marketing of its footwear through channels, such as opening its own retail stores, trying to have, you know, showplaces, basically, for the shoes.

So I looked at it and I thought, this was an intriguing company because, in fact, Wall Street had lost faith in the, particularly, the UGG brand, and growth in the UGG brand, and I thought, if this brand, in fact, still is quite popular and that was just a hiccup in 2012, this stock still was cheap.

And, in fact, it looks like they have turned around sales and the market is once more interested in the stock.

Steven Halpern: Now, you also point out that the mattress business has been very competitive and that's hurt recent prospects from Tempurpedic Sealy International (TPX). Can you tell us what's going on with that company?

Tom Petruno: Well, Tempur-Sealy was the old Tempurpedic and they really rode the popularity of memory foam mattresses between 2009 and 2012, stock went from $10 up to about $87.

Then it really hit a patch where the competition in foam mattresses just got vicious, so sales and earnings fell in 2012.

What happened then is Tempur bought up Sealy corp., which makes lower end mattresses, and their idea there was, well, we got the high end and now let's really pick up brands more in the low brand so we're covering the entire spectrum of sales.

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So, in 2013, Tempur's total sales were $2.5 billion, making it the world's biggest bedding maker. The problem is waiting on the earnings. Tempur says that, with Sealy, it broadens its line of mattresses which, ultimately, is potentially a great strategy, but those also had lower profit margins.

The other issue; it's loaded up with debt because of the acquisition, but the way Wall Street looks at it is they can make this work both in the high end and the low end.

This is a period of, basically, digesting the acquisition and, you know, if you believe that people still need bedding, I mean, this is the world's largest maker of bedding, and the growth prospects look pretty decent, looking out in the next few years. The debt is a concern, but, so far, they've been managing it pretty well.

Steven Halpern: Finally, another company that's had a difficult few years is Weight Watchers International (WTW). Can you tell us what you see there?

Tom Petruno: Well, Weight Watchers, as I describe it in the article, you know, Weight Watchers is one of those that, it could very well be headed for oblivion.

What happened with them is they really missed out on the idea—or the development of—online apps, for example, for weight management, devices that people wear, and so, their revenue just has plummeted in the last couple of years and they just missed this trend.

They didn't really understand what was going on out there and their customers just, sort of, walked away in many respects.

One issue is, of course, when you join Weight Watchers, you're going to meetings and you're buying their foods and so forth. A lot of these new diet plan mobile applications are, basically, free.

People don't have to pay anything. The issue is, do they work? And Weight Watchers, you know, they will point to their historical record where they claim, in fact, that their plan works better than a lot others.

Well, some people aren't necessarily sure that's true, but they're trying to remake the business now. They're trying to become more Web-oriented as well, and so, the stock is trading at about 14 times this year's earnings.

That's cheaper than the market, for sure, if they can stop the slide in customer defection.

If they can, in fact, use their marketing budget wisely and bring people back and if, in fact, people, sort of, look at these free diet plans and say “Well, I tried this for six months, it really didn't work,” then there's a chance that the franchise could be revised.

But this is a very speculative one, in large part, because they loaded up on debt in the last few years to do stock buybacks. So this is one—it's a complete speculation.

If they turn it around, the stock is worth more than its trading now, but there's a really good chance, a significant chance that they don't turn anything around and stock that looks cheap at around $21 bucks suddenly is $10.

Steven Halpern: Well, we really appreciate you taking the time today. Thanks for joining us.

Tom Petruno: Thank you.

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