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When it comes to money management styles, there is no consensus. Some investment pros look for stocks showing “relative strength,” meaning they’ve been trading very well in recent sessions. Yet some money managers shun that approach, preferring out-of-favor stocks. These pros often turn to the list of stocks making new 52-week lows as a source of ideas.
It’s been slim pickings for these investors, but this week’s sharp selloff brings a silver lining: The number of stocks hitting new 52-week lows is now rising quickly. In fact, new lows outnumbered new highs for this first time all year on April 4. Among the stocks that are plumbing the depths are some intriguing names.
1. Titanium Metals (NYSE: TIE)
This company provides raw and processed titanium to airplane makers, sporting goods firms and others that need the metal’s high strength and low weight. Shares have been slumping on concerns of a global economic slowdown, which would crimp demand. Right now, analysts expect sales to rise 13% in 2012 to $1.18 billion and another 20% to $1.45 billion in 2013. Then again, management doesn’t hold conference calls, so analysts are just making their best guess. Perhaps the weak stock chart tells you that near-term estimates are too high.
But this stock has one huge backer: Chairman Harold Simmons. He’s been buying shares for more than a year — at prices above current levels. Along with other insiders, he controls more than 50% of the stock. Even as the stock has been falling, rumors have swirled that Simmons’ heavy insider buying is a prelude to a takeover. His $9 billion net worth gives him ample firepower to take the company private.
2. Deckers Outdoor (Nasdaq: DECK)
This footwear and accessories vendor was a scorching hot growth stock in recent years, thanks to insatiable demand for its UGG boots. Shares rose from $12 in early 2009 to above $110 this past fall, but have since fallen by nearly half.
The selloff is due to three factors: The warm winter dampened sales of UGG boots (and also likely led the company to carry abnormally high inventory levels in the first quarter); a 40% spike in the cost of sheep-skin — a key raw material for the UGG boots; and higher-than-expected spending to expand the company’s international sales infrastructure.
Yet all of these negatives should reverse themselves in the coming year, according to analysts at Auriga Securities. Though they concede that near-term results will likely be lackluster, they spot a big earnings rebound coming later in 2012 and into 2013, at which time earnings per share (EPS) should hit a record $6 a share. That’s why they see shares rebounding from a recent $65 to $100 over the next 12 months — good for a 35% gain. The recent stock price slump has been beneficial in one respect: Deckers is in the midst of a $100 million stock buyback, and can buy more shares when the stock price falls.
3. Pain in the gold patch
A whole raft of gold producers have seen their stocks hit 52-week lows this week, including Barrick Gold (NYSE: ABX), Newmont Mining (NYSE: NEM), Goldcorp (NYSE: GG), Kinross Gold (NYSE: KGC), Goldfields (NYSE: GFI) and Harmony Gold (NYSE: HMY).
The selloff comes at a time when gold itself has moved a bit higher thus far in 2012. Yet this is part of a larger trend: In 2011, gold rose 9% in value, while a market-weighted basket of gold-mining stocks fell 12%.
Why the disconnect? It’s because a number of gold miners are dealing with rising development costs, which is eating into profits. And some miners, such as Kinross, have had to take big write-downs as well, as key mines will not be as productive as initially hoped.
Still, with the underlying commodity holding firm, many of these stocks now look like bargains in terms of Net Asset Value (NAV). Many of those NAVs are calculated on initial costs and don’t fully reflect the value of each ounce of gold that is yet to be tapped. Merrill Lynch uses Barrick Gold as an example. The NAV of the mines is around $32 per share, but Merrill thinks shares should trade for two times NAV, or $64 a share. That’s more than 50% higher than the current stock price.
Merrill’s analysts recently attended meeting held by Goldcorp, and after running through the numbers, figure shares are worth $67, which is also more than 50% above current levels.
Rather than focus on one stock, investors can also bottom fish with the Market Vectors Gold Miners ETF (NYSE: GDX), which holds a basket of gold-mining stocks and is also trading near a 52-week low.
4. Coal is not King
Lastly, sentiment around coal-producing stocks continues to plunge as low natural gas prices lead to falling demand for coal in power plants. Alpha Natural Resources (NYSE: ANR), Arch Coal (NYSE: ACI), Patriot Coal (NYSE: PCX) and James River Coal (Nasdaq: JRCC) all hit multi-year lows this week. The selloff now appears overdone, as these stocks trade for just two to four times cash flow — even when applying the most bearish forward assumptions for demand in 2012. This is surely a group that is so out of favor that it is now worthy of further research. And like the gold miners above, you may decide that a basket approach is your best bet, in which case the Market Vectors Coal ETF (NYSE: KOL) would be the way to go.
Risks to Consider: Even as these stocks scrape fresh lows, they may not rebound imminently, as near-term woes need to be worked through.
Action to Take –> The real charm of unloved stocks is that they’ve already taken a beating, and though they could fall further, they don’t carry the risk of a major selloff that better-loved stocks do if investors’ moods sour. Aside from Titanium Metals and Deckers Outdoor, which merit further research on their own, I like the idea of taking a basket approach to gold miners and coal.
– David StermanSource: StreetAuthority
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