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Stock screens are only a start to the investing process. But screens are important. Every investor needs a way to winnow down the investing universe. Value investors, often times, like to start looking for new ideas in the bargain bin—where stock price have been deeply discounted.
Barron’s has peered into the bin a couple of times before now, searching for what we called a dirty dozen beaten up stocks that could bounce. The results, so far, have been pretty good, spurring us on to look for a third dirty dozen. Everyone, after all, loves a trilogy.
The first screen was in April. The original dirty dozen included:
Pentair
(ticker: PNR),
Steel Dynamics
(STLD),
Las Vegas Sands
(LVS),
Curtiss-Wright
(CW),
Aptiv
(APTV),
Lear
(LEA),
Ralph Lauren
(RL),
General Motors
(GM),
Southwest Airlines
(LUV),
Expedia
(EXPE),
Valero Energy
(VLO), and
Devon Energy
(DVN).
From April to July—when Barron’s first checked back in—the group rose about 16% on average, better than the comparable gain of about 13% for both the
S&P 500
and
Dow Jones Industrial Average.
The first 12 has kept working. Since July, the 12 have risen another 10% while the S&P is up another 6%. What’s more, 10 out of the 12 stocks are up since early since the original screen. The hit rate has been pretty good.
Barron’s identified another dozen in July. Don’t forget, we don’t want to take unnecessary risks—buying bad businesses just because they are cheap. All companies selected have below average debt and have generated positive free cash flow over the past year.
The next dirty dozen yielded:
Cabot Oil & Gas
(COG),
Medtronic
(MDT),
Universal Health Services
(UHS),
L3Harris Technologies
(LHX),
Northrop Grumman (NOC),
Elanco Animal Health
(ELAN),
Biogen
(BIIB),
Huntington Ingalls Industries
(HII), Hershey (HSY), Baxter (BAX),
Cboe Global Markets
(CBOE), and
Mercury Systems
(MRCY).
Those were 12 stocks down year to date and that had fallen between April and July. Since then, the second dozen beat the market, but only by a hair. The second 12 rose an average of 6.3% compared with the S&P 500’s 5.8% rise. Seven of the 12 stocks rose since July.
The third dirty dozen meet all the prior cash flow and debt criteria, plus their stock prices must be down 25% year-to-date and down since July. They include:
ConocoPhillips
(COP),
Pioneer Natural Resources
(PXD),
EOG Resources
(EOP),
Chevron
(CVX),
Cirrus Logic
(CRUS),
FLIR Systems
(FLIR),
Hexcel
(HXL),
World Wrestling Entertainment
(WWE), Euronet Worldwide (EEFT),
Jabil
(JBL),
CDW
(CDW) and
Citigroup
(C).
Energy is still well represented in the beaten up stock category. Energy components of the S&P 500 are still down 46% year to date and have dropped about 12% since early July. Benchmark crude oil prices are down about 7% since then. The energy sector has had it rough this year with supply and demand both going in the wrong direction. The four new energy stocks in our screen, however, all still pay a dividend. The average yield is north of 4%.
For the first time in the screening process tech—Jabil, CDW and Cirrus—as well as traditional financials—Euronet and Citigroup—showed up.
Cirrus makes microchips. Its stock got a bump Monday, rising 3.4% after
NVIDIA
(NVDA) agreed to buy chip maker ARM from
SoftBank
(9984.Japan) for $40 billion.
The rest are difficult to group. FLIR has a consumer and defense franchise. It faltered after second quarter earnings were reported, falling about 9%. Hexcel—a composite material supplier—has been through a failed merger attempt with
Woodward
(WWD) and is dealing with reduced commercial air travel demand due to the pandemic. A lot of composite materials end up on commercial jets.
World Wrestling is the last new stock. It’s difficult to compare or categorize.
Overall, the latest dirty dozen fell about 8% over the past couple of months. The new dozen stocks are still down about 37% year to date on average.
The new group’s valuation multiples are all over the place. Some of the energy companies, for instance, aren’t expected to make much money at lower prices. Citigroup, on the other hand, trades for less than 8 times estimated 2021 earnings.
While it’s difficult to compare Citigroup financials to, say, World Wrestling numbers, there is one comforting thing the group has: Wall Street approval. About 70% of analysts covering the company rate shares the equivalent of Buy. The average Buy rating ratio for stocks in the Dow is about 58%. Hexcel is the least loved stock of the new dozen. Less than 40% of analysts rate its shares Buy. Every other stocks has a Buy-rating ratio at 50% or above.
Incredibly, only one of the 36 stocks turning up in all the dirty dozen screens is up year to date—Cabot Oil & Gas. A couple others including Baxter, Mercury and Pentair could be considered no longer beaten up based on returns and valuation multiples.
That, of course, is only a rough approximation of not beaten up. Those three still lag behind the market year to date.
Write to Al Root at [email protected]
