Stocks that have been smacked around often make the best buys. I regularly compile a casualty list of stocks that have been beaten up in the previous quarter, and that I think have excellent recovery potential. This fits with my favourite investment technique, which is to buy stocks of good companies on bad news that I believe is temporary.
The Standard & Poor’s 500 Index rose 11% in the third quarter. A quarterly decline of 10% was enough to relegate a stock to casualty status this time.
Among approximately 2,100 US stocks with a market value of $500 million or more, 92 were down 10% or more in the third quarter. Most of them flunked my basic value criteria: a stock price 15 times earnings or less, and debt less than stockholders’ equity. Among the 19 banged-up stocks that met my criteria, I recommend four. Let’s start with Sanderson Farms Inc.
The Laurel, Mississippi-based chicken producer was down 15% in the third quarter, and 18% since I recommended it on February 21. Clearly, my recommendation was badly timed. A poor US harvest contributed to a 53% increase in the spot price of No 2 yellow corn in the past eight months. High prices for feed grains make the lives of chicken farmers harder. Also, the economy hasn’t rebounded as strongly as I thought it would.
Over the next few years, I believe corn prices will moderate, and some measure of prosperity will return to the US. Today, Sanderson Farms shares sell for about $42, which works out to less than nine times earnings and 0.5 times revenue. Those valuations make me feel very comfortable.
The price ratios at Skechers USA Inc are even better: six times earnings and 0.5 times revenue. Following a 36% decline in the third quarter, I consider Skechers is a better buy than it was when I wrote about it earlier. Analysts expect earnings to climb to about $2.90 a share this year compared with $1.16 in 2009. Now, the No 2 US sneaker-maker behind Nike Inc, Skechers is opening more stores this year, bringing its total to about 300.
Amedisys Inc , the largest US homenursing provider, fell 46% in the third quarter. Propelling the drop were allegations that the Baton Rouge, Louisiana, company may have improperly billed Medicare. The company is suffering through investigations by the Securities and Exchange Commission, the US Justice Department and the Senate Finance Committee. I predict the controversy will end in a negotiated settlement.
Health care in the US is too expensive. Amedisys and its competitors help to reduce the need for hospitalisations, thus saving the health-care system a lot of money. Amedisys had a 21% return on equity last year and has reported profits in 11 consecutive years. In the past five years, its earnings per share rose at a 29% annual clip. Yet, because of its legal woes, the stock now sells for less than six times earnings.
Beckman Coulter Inc, located in Brea, California, makes laboratory instruments. For the past five years, it has sold, on average, for 18 times earnings. Today, investors can buy it for 14 times earnings. The stock fell 19% in the third quarter, hit by a triple whammy. In June, the company received a warning letter from the US Food and Drug Administration concerning failure to pre-clear one of its medical-test products.
In July, it announced earnings that fell short of analysts’ expectations. And, in September, chief executive officer Scott Garrett resigned. A year from now, I suspect that all three of those adverse events will be forgotten.
