Turnaround Expert's "Lazy Dogs"
03/08/2017 7:00 am EST
We created our own version of the Dogs of the Dow: we selected the seven stocks that have completely missed the rally over the past three years. If these lazy dogs get off the porch, they could have a market-beating run, explains George Putnam, editor of The Turnaround Letter.
All seven are solid, well-run companies with healthy balance sheets. Many offer attractive yields. Some offer defensive traits should the stock market or oil prices turn downward. Others have unique company-specific aspects that could bring them back to life.
American Express (AXP)
The question for Amex: has its long domination of premium credit cards come to a close in the face of aggressive new competition, push-back on its high merchant fees and a greater regulatory burden?
More recently, the company has shown signs of turning back the tide with stabilizing core revenues, more competitive products and market share gains. Warren Buffett remains a committed 8% shareholder. At 13.7x forward earnings, American Express could be ready to charge ahead.
As the second-largest integrated U.S. energy company, Chevron has aggressively pared its cost structure and looks poised to continue growing its production — by 4% to 9% in 2017.
The company could return to strong free cash flow this year as its capital spending cycle winds down. If the cash flow continues to rebound as expected, it could be used to repurchase shares and boost the already-attractive 3.9% yield.
With its vast scale, diversified operations, fortress balance sheet and legendary discipline, Exxon is the safe holding for turbulent times in the energy sector. The company is not immune to weak oil prices though, as earnings are down 70% from their peak in 2013.
With oil prices rising, the safety feature of Exxon’s stock isn’t in demand as much anymore. Exxon rarely seems attractive when oil prices rise, but it might not take much oil price weakness to bring investors back. Also, its 3.5% yield looks rock solid.
Revenues have declined for a remarkable 19 consecutive quarters. The company is working aggressively under CEO Ginni Rometty to transition away from its commodity hardware and software products, toward more promising cloud-based and “cognitive” computing offerings.
The real excitement for IBM is the potential to use powerful new technologies like the much-advertised “Watson” to take computing to a higher level which could propel the company back to strong revenue and profit growth. The stock remains below its year-end 2013 price and could be an interesting long-term holding.
United Technologies (UTX)
A member of the Dow Jones Industrial Average since 1939, industrial conglomerate United Technologies makes Otis Elevators, Pratt & Whitney jet engines, military and commercial aerospace components and a range of climate control and security systems.
Last year, UTX stock rebounded nearly 30% from its lows as confidence recovered in key markets like China and Europe. From here, demand for its cyclical big-ticket items needs to remain healthy. Strong free cash flow, along with its below-market P/E multiple, provides an element of stability for UTX.
As the largest U.S. wireless service provider, Verizon is struggling to maintain its $126 billion revenues. Subscriber growth has stalled to near-zero as the smartphone shift is essentially complete, wireline revenues continue to fade and competition is increasingly aggressive with pricing.
The move to unbundled wireless contracts (well-underway) will help expand margins and free cash flow, as might better pricing on next-generation 5G services.
Also, Verizon has industry-leading technology which could produce higher profits if better-utilized. The recent 10% drop in its share price, plus a Dow-leading yield at 4.7%, may offer investors a good entry point.
WalMart’s $500 billion in sales would make it the 24th largest country in the world. This vast scale, however, has not helped it fend off accelerating competition from on-line retailers, aggressive grocery competition, higher capital spending and labor costs and saturation of its geographic markets. Its shares remain 15% below their year-end 2013 price.
While new CEO Doug McMillon’s efforts to improve the company’s culture, practices and strategy are showing progress, investors have moved on to other faster growing companies.
Nonetheless, the right strategy tweak could get the stock back on the rise. The shares trade at a below-market 15.2x forward earnings multiple and provide an above-market 3.0% yield.