Five US stockmarket laggards that may just prove to be bargains down the road
Published 28/10/2010 | 05:00
As the US stockmarket has risen in six of the past seven weeks, investors are starting to feel that 2010 isn't so bad after all.
Some securities, however, have missed the party. Among the stocks in the Standard & Poor's 500 Index, about three dozen have declined 20pc or more so far this year. The S&P 500 is up 5pc.
Some of these laggards now look like bargains. Here are five that I want to bring to your attention:
- H&R Block, the nation's largest tax preparer, is down 45pc so far this year.
- Nvidia, a maker of 3-D graphics processors, has seen its shares drop 40pc.
- AK Steel Holding, the third-largest US steelmaker, is down 34pc.
- Boston Scientific, the world's No 2 heart-device maker, has fallen 32pc.
- Micron Technology, the largest US maker of computer-memory chips, is down 28pc.
Let's take a closer look at these five companies, trying to distinguish temporary bad news from weaknesses that are more lasting.
H&R Block, based in Kansas City, Missouri, must rue the day it strayed from tax preparation and got into originating mortgages -- a move that led to losses of about $1bn on sub-prime loans.
Though it left that business in early 2008, Block, like other mortgage providers, still faces possible litigation over its past loans.
To make matters worse, fewer people are walking into the company's offices to have their taxes done. An increasing number of folks do them at home using online programs such as TurboTax, made by Intuit Inc.
Block's chief executive Russell Smyth resigned last summer after less than two years on the job. Meanwhile, Thomas Bloch, a member of the company's board and a member of the family that built the company, announced he was stepping down due to disagreements with chairman Richard Breeden and "the intense pressure from short-term oriented shareholders", according to a letter to the board filed with regulators.
What, then, do I like about H&R Block? I am attracted to its cheap price, at eight times earnings. I like its dividend yield of almost 5pc. I think it's interesting that three insiders have purchased Block shares recently. And I believe the company may become a takeover candidate.
Two of H&R Block's rivals have already indicated their willingness to be bought out. Block has said it prefers to remain independent -- but we'll see.
You might think Nvidia would be popular, given the growing use of 3-D effects in games and movies. Yet most analysts don't like this Santa Clara, California-based company. In fact, their 'target price' is now $11.16, 13 cents below the stock's actual price.
Nvidia disappointed investors with its second fiscal quarter results. Revenue fell to $811m, from a bit more than $1bn in the first quarter. It lost 25 cents a share compared with a 23-cent profit in the first quarter.
Nvidia's price-earnings ratio of 17 may not seem especially cheap, but consider this: shares traded for a median P-E of 36 for the past 10 years. This leaves room for pleasant surprises.
AK Steel, located in West Chester, Ohio, is a classic cyclical stock, losing money when the economy is weak and making profits when things are good. This year the economic news has been mixed. On balance, though, it seems to me that an economic recovery is likely to continue in the US and Europe.
The stock sells for 0.3 times sales, a ratio that is pretty close to its 10-year average. The chances for a capital gain here depend on the company's success at increasing revenue.
That's not a bad bet, in my view. Sales have increased four quarters in a row, and annualised revenue is at about $6bn, not too far from the $7bn pace in 2007 and 2008.
Boston Scientific, located in Natick, Massachusetts, makes heart stents, pacemakers, and a variety of other medical devices. Only five analysts like it, out of 31 who cover it.
Although it famously overpaid for Guidant in 2006, and has lost money four years in a row, Boston Scientific has some strengths. It offers a rich variety of products, manages to stay competitive in a tough industry and sells for modest valuations. The shares trade at less than book value (admittedly inflated by goodwill from the Guidant acquisition) and 1.2 times sales.
Rounding out my list of lovely laggards is Micron Technology, which is a comeback story. The Boise, Idaho-based company earned $1.85 a share in fiscal 2010 which ended in August, reversing three years of losses.
Memory chips are the company's specialty. There was a worldwide glut of them from 2007 to 2009, but the oversupply has eased, and companies are being restrained in building new factories to produce them.
Over the past 10 years, Micron sold for a median P/E of 34. Today, it trades at only five times' earnings.