Smacked-around stocks usually are a good bet for the long term

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.

Sensex to hit 21,000 mark on Diwali: Analysts

The Bombay Stock Exchange's benchmark Sensex is likely to hit the much awaited psychological level of 21,000 in the next week, driven by the smart RIL numbers and expectations of robust listing of the Coal India IPO, say analysts.

Sensex, which saw a subdued performance last week by shedding 0.66 per cent, mainly on account of tight liquidity, may bounce back by surging over a staggering 1,000 points.

"The country's most valued firm Reliance Industries has posted better-than-expected second quarter numbers, which will boost the investor sentiment and lead the market to the 21,000-mark on Diwali ," CNI ResearchChairman and Managing Director Kishore P Ostwal said.

On Saturday, Mukesh Ambani-led Reliance Industries had posted a robust growth of 27.8 per cent in its net profit for the second quarter ended September 30, at Rs 4,923 crore against Rs 3,852 crore in the year-ago period.

Besides, the Reserve Bank of India's (RBI's) quarterly review policy on November 2 and Coal India, which will list on the bourses on November 4, are the two big fat issues on which the market will heavily bank upon, feel marketmen.

Coal India to raise Rs 15,000 cr from largest ever Indian IPO

NEW DELHI: The government will raise up to $3.5 billion from a price band of Rs 225 to Rs 245 for state-run Coal India's initial public offering, the largest in the country's corporate history. The government is selling 631.6 million shares, or 10 percent stake in the world's largest coal miner.

The share sale is part of the country's plan to divest its stakes in roughly 60 companies over the next few years. "I think the pricing is much better than what we were expecting. We were expecting it to be Rs 260 at the upper end," said Ambareesh Baliga, vice president of Karvy Stock Broking in Mumbai.

"The response from institutional investors is expected to be very good," he added. Priced at the top end of the band, the company would be valued at $35 billion, placing it among the top Indian firms by market value. It is the seventh-largest IPO in Asia this year.

Speaking to reporters on Tuesday, the country's coal minister said the IPO would raise more than Rs 15,000.

Sources said the EGoM fixed the price band at Rs 225- Rs 245 a share to garner maximum from the four-day initial public offering (IPO), billed as the biggest ever to hit the Indian capital market on October 18.

The four-member EGoM includes Home Minister P Chidambaram, Coal Minister Sriprakash Jaiswal and Planning Commission Secretary Sudha Pillai.

Among other factors, EGoM considered the share prices of major global coal companies including China Shenhua Energy Company, the world's most valuable coal producer, to arrive at a figure, sources added.

CIL filed the prospectus (Red Herring Prospectus) for the issue with SEBI, after being cleared by the Registrar of Companies, in the last week of September. Its board cleared the revised papers incorporating 78 changes suggested by the market regulator.

With over 63 billion tonnes of coal reserves under its fold, CIL is targeting an output of 461.5 million tonnes in the current financial year.

The biggest IPO in India till date is that of Anil Ambani Group company Reliance Power . In January, 2008, it raised Rs 11,500 crore.

Coal India, based in Kolkata, holds a dominant position in the fast-growing Indian market. The state monopoly produced 431 million tonnes in 2009/10 and accounts for nearly 80 percent of coal output in Asia's third-largest economy.

Coal powers 75 percent of India's electricity output, and annual demand is expected to swell at 11 percent. The country, which faces a peak-hour power deficit of nearly 14 percent, plans to triple its generation capacity over the next decade. It reported earnings per share of Rs 15.60 for the fiscal ended March 2010. China's Shenhua Energy, the Indian miner's closest rival, trades at 16 times earnings, while smaller Indonesian peer Adaro Energy has a price-to-earnings ratio of 20 times.

U.S. miner Peabody Energy trades at 25 times earnings. The IPO opens on October 18 and closes on October 21. The listing on the Bombay Stock Exchange is expected by Nov 4. Morgan Stanley, Citigroup, Kotak Mahindra Capital, Enam Securities, Deutsche Bank, and Bank of America-Merrill Lynch are the managers for the offer.