The unfortunate turn of recent events in the stock market could be creating at least a modest flood of opportunity for contrarian investors, suggests George Putnam, editor of The Turnaround Letter.
This may be particularly true as we approach year-end, when artificial selling pressure, created by investors tossing their losers, offers some unusual short-term bargains. Once the selling pressure ends with the new year, many of the previous year’s worst performing stocks bounce upwards, sometimes sharply.
Nimble investors can capture some of the bounce before longer-term fundamentals and valuations take over after a month or so. Investors can also use the opportunity to start new positions in attractive longer-term investments.
Described below are six stocks that have some of the worst returns year-to-date. All are in the S&P 500, and represent a diverse roster of promising bounce candidates.
Affiliated Managers Group (AMG)
Like many investment management firms, AMG has suffered from outflows as clients increasingly migrate toward index products. Also, many of its products invest outside of the U.S. where market returns have been weak.
The shares have lost close to half their value this year and now trade at the same price as they did in 2012. Yet, it has capable leadership that oversees a diversified and high-quality stable of top investment managers in public and private equities and alternative investments, including the innovative AQR Capital Management.
Its unique boutique model helps preserve its profits while keeping its managers motivated to produce strong returns. AMG’s balance sheet is sturdy, supported by strong free cash flows.
Applied Materials (AMAT)
This company is perhaps the premier producer of equipment that makes semiconductors. As chips become almost impossibly small and complex, Applied’s market position continues to strengthen.
Secular growth in chip demand is likely to remain robust, driven by the ever-increasing need for computing power. However, the industry is cyclical, with investors worrying about gluts in several types of chips.
AMAT shares have fallen over 40% from their peak earlier this year. Applied is led by the highly-regarded Gary Dickerson, has a robust balance sheet with over $4 billion in cash nearly offsetting its modest amount of debt, and is highly profitable.
Halliburton (HAL)
One of the largest providers of services to oil and gas drillers, Halliburton has been pressured by softening demand and pricing. The sharp fall-off in oil prices has compounded investor worries about Halliburton’s prospects, especially in North America.
The shares, down over 40% from their early 2018 highs, are approaching their lows following the 2014 oil price crash. Yet, the company remains a pre-eminent supplier in a critical industry, while the global demand for oil isn’t going away anytime soon. Halliburton’s operations are highly profitable, backed by a well-capitalized balance sheet.
IBM (IBM)
Investors are losing patience with this former technology icon as it continues to struggle with weakening revenues. After steadily falling from over $215, IBM’s shares dropped nearly 25% since early October, capped by surprise and frustration over long-time CEO Ginny Rometty’s massive $34 billion deal to acquire cloud-computing firm RedHat.
Few investors since 2009 have a profit in IBM shares, leading to perhaps an “easy sell”. Nevertheless, with sentiment and valuation at low levels, the shares could be poised for a rebound, supported by the appealing 5.3% dividend yield.
The Kraft Heinz Company (KHC)
After the profit margin enhancing 2015 merger, Kraft Heinz has fallen on less-favorable times. Like many food companies, Kraft Heinz is suffering from sluggish revenue growth and lower profits. KHC shares have dropped by a third this year and by nearly half since reaching over $95 in early 2017.
However, the company’s issues aren’t existential, as its profits and cash flow remain sturdy and its balance sheet is healthy. The management is capable and focused intently on reinvigorating its revenue growth. Deal-oriented 3G Capital and Berkshire Hathaway (BRK.B) remain major shareholders, which may mean another margin-enhancing acquisition is in the company’s future.
