Not every stock that gets banged up deserves it. Finding injured stocks that have recovery potential is the point of my quarterly Casualty List.
The list you are about to read is my 56th Casualty List. Twelve-month performance can be calculated for 52 of the lists, and the average total return on my selections (beginning in mid-2000) has been 18.3 percent That compares well with the 9.2 percent return on the Standard & Poor’s 500 Index for the same periods.
Thirty-seven of those 52 Casualty Lists have been profitable, and 30 have beaten the index.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
My list from April 5, 2016, returned 28.5 percent through March 31. The S&P 500 was up 18.0 percent for the same period. Marathon Petroleum Corp. (MPC) and Universal Insurance Holdings Inc. (UVE) were each up more than 40 percent. The laggard was Frontline Ltd. (FRO), down about 3 percent.
So, what’s on the Casualty List today?
Transocean
I’ll start right out with a risky pick — Transocean Ltd., a deep-water drilling company based in Vernier, Switzerland. I think it will be a year or more before the deep-water drilling industry starts coming back. But the stocks, deeply out of favor, may recover sooner than the underlying business does.
Transocean at its peak in 2007 sold for more than $150 a share. Today it fetches less than $13 a share. The business may never have been as magnificent as people thought in 2007 but I don’t think it is as feeble as people think today.
Transocean trades for six times recent earnings and less than 0.4 times book value (corporate net worth per share). This one is for investors with a high risk tolerance. The company has $8.5 billion of debt, much of which is deemed junk by the ratings agencies. But I think this deep-value pick will pan out.
Essendant
A small stock that fell 27 percent in the first quarter is Essendant Inc. (ESND), which distributes janitorial, food-service and office supplies. Based in Deerfield, Ill., the company has shown a profit in 14 of the past 15 years. But profitability has been unimpressive from 2014 on.
The shares fell in February after the company announced a small loss for the fourth quarter of 2016. Only four analysts cover the stock, and all four rate is a “hold,” which on Wall Street usually means, “I’m not impressed.”
Since no one else seems to like Essendant, let me say why I do. On all three of the valuation metrics I use the most — the price/earnings ratio, price/book ratio, and price/sales ratio — the stock is close to a five-year low. It yields 3.7 percent in dividends. And it has been paying down some debt.
Waddell & Reed
Is there room in today’s financial firmament for an old-fashioned money-management company? I say yes, and one that I think is a good buy now is Waddell & Reed Financial Inc. (WDR), which fell 13 percent in the first quarter.
Index investing is stealing a lot of Waddell’s customers. The theory is that you’re unlikely to find a manager who can beat the market consistently, so why not just mimic the overall market, and pay low fees instead of high ones?
These things go in cycles. Money managers can add value and can beat the index at times, such as when market leadership changes or when the market turns sour.
No wonder indexing is popular today when the overall market has been up eight years in a row. But I think it will be a lot less popular in two or three years. At 10 times earnings and 1.1 times revenue, I think Waddell & Reed is a good value.
Universal Insurance
Despite its good 12-month return, noted above, Universal Insurance was down about 14% in the first quarter. So, I’m putting it on the Casualty List again.
The company, which has its headquarters in Fort Lauderdale, Fla., writes homeowners insurance, which it sells both through agents and on the Internet. It also offers reinsurance contracts to other insurance companies. It has shown a profit 12 years in a row, with high profitability in ten of those years.
Even after a 49.7 percent rise from April 5, 2016, to March 31, the stock is not pricey. It fetches about 9 times earnings and 1.3 times revenue.
Disclosure: I own Waddell & Reed for a couple of my clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.