It is time for investors to consider “bottom-fishing” in a few hard-hit sectors—retail and energy.
Brick-and-mortar retailers ranging from Macy’s and J. C. Penney to Bed Bath & Beyond, Kroger and Urban Outfitters have been devastated by Amazon.com and other online competitors and by a shift away from mall shopping. Energy companies have been crushed by weak oil and natural gas prices.
But as stocks in both these sectors have plunged, there are a handful of retail and energy companies that don’t deserve to see their share prices continue to suffer. And the sagging stocks of these companies provide some of the best opportunities for investors to profit in a stock market that is showing signs of being way overpriced as it has repeatedly set new record highs this year.
Investors in the two ailing sectors have been so focused on the carnage that even modest profit improvements could send share prices of these unloved stocks jumping.
To help readers find the potential winners, Bottom Line Personal spoke with two masters of bottom-fishing. Top fund manager Tom Mangan, who hunts for undervalued shares, zeroed in on deeply marked-down retail stocks that can fend off Amazon and other online retailers…and turnaround-stock specialist George Putnam searched for potential rebounds among some of the most hated corners of the energy market such as coal mining and oil-drilling equipment.
Here are Mangan and Putnam’s favorites now…
Plunging prices for retail stocks over the past year have included a drop of 61% for J. C. Penney…42% for Macy’s…44% for Urban Outfitters…38% for Bed Bath & Beyond…and 30% for Kroger.* But certain retail niches such as discount chains and regional grocers are less vulnerable to the Amazon effect. Some retailers within these niches are finding ways to survive the online trend.
Two retail stocks worth considering now…
• Ingles Markets (IMKTA). This supermarket chain operates more than 200 stores in six southeastern states with total annual sales of nearly $4 billion. Like many stocks in the supermarket/grocery sector, its stock went into freefall after Amazon.com announced a $13.7 billion deal in June to acquire Whole Foods. Ingles Markets shares were down 54% for this year as investors worried that Amazon/Whole Foods, now the fifth-largest grocer in the US, will use its marketing prowess and loyal customers to steal market share from traditional supermarket chains.
What investors are missing: Ingles focuses on smaller towns and rural communities throughout Alabama, Georgia, North Carolina and South Carolina, Tennessee and Virginia, areas that are not very attractive to large supermarket chains and that Amazon/Whole Foods is unlikely to even target. Ingles’s history of strong cash flow and steady annual growth is likely to continue. Gross profits for the nine months through June 24 were up 2.2% year-over-year to $702 million. Ingles has paid out an annual dividend, recently yielding 3.1%, since 1988. One-year stock performance: –41%.
• Big Lots (BIG). This closeout discounter operates more than 1,400 stores in 47 states, offering merchandise purchased from manufacturers looking to unload excess inventory. Prices are up to 70% below those at traditional retailers. The stock’s price-to-earnings ratio, a common measure of valuation, has shrunk to just 13 versus about 24 for the Standard & Poor’s 500 stock index because e-commerce is reducing the need for consumers to visit shopping centers. One-year stock performance: –3%.
What investors are missing: Big Lots is more insulated against the Amazon threat than traditional retailers are partly because its offerings turn over so frequently, lending itself to in-store “treasure-hunting.” Shoppers go to Big Lots stores to browse the aisles for surprise bargains. Its core customers typically make small purchases that fail to clear Amazon’s $25 hurdle for free shipping, and they aren’t likely to pay for an Amazon Prime $99 annual membership, which includes free shipping. Big Lots management is overhauling store layouts to focus more on its fastest-growing categories with the highest profit margins, such as furniture, mattresses and home decor. Big Lots customers prefer to inspect these items up close rather than on a website.
Source: Tom Mangan is a senior vice president of James Investment Research, Inc., based in Xenia, Ohio, and a comanager of six James funds including its flagship value-focused James Balanced: Golden Rainbow Fund (GLRBX). The fund’s 7% annualized return over the past 15 years ranks in the top 14% of its category. JIR-Inc.com
The energy sector of the Standard & Poor’s 500 stock index was down 17% this year as of August 30, and stocks in the oil-equipment and services industry dropped 40%. That is due to a global oil glut and resulting low oil and natural gas prices that are likely to persist for years. Energy subsectors such as coal mining have been pummeled because of competition from natural gas and new US environmental regulations adopted in recent years. Domestic coal production slumped to a three-decade low last year. But there are companies with catalysts for growth despite this depressed environment.
Three energy stocks worth considering now…
• Civeo Corp. (CVEO). Civeo builds rental facilities for multinational energy firms that are drilling on land and in off-shore areas too remote for conventional housing in the US, Canada and Australia. The company provides more than 23,000 units in modular villages that include dorms, a kitchen and recreational facilities, as well as amenities ranging from laundry services to food catering. Revenue has declined nearly 60% since 2014. 2017 stock performance: –10%.
What investors are missing: Civeo recently won multimillion-dollar lodging contracts with liquefied natural gas (LNG) producers, and there are about 20 proposed LNG export facilities in Canada now in various stages of planning. LNG production is likely to be one of the most profitable areas of energy in coming years as Canada and the US become major exporters to the rest of the world. Currently, about 70% of Civeo’s revenue is generated from Canadian oil-sands drilling sites that will benefit from two major oil pipeline projects that the Canadian government recently approved.
• Peabody Energy (BTU). The thermal coal produced by Peabody, the world’s largest publicly traded coal company, still fuels 5% of all electricity generated in the US. Peabody also produces significant amounts of metallurgical coal used in steel production. Back in April 2016, a sharp drop in coal prices left the company unable to service $10 billion worth of debt, mostly incurred from expanding its coal-mining operations in Australia. Peabody operated under Chapter 11 bankruptcy protection until it emerged in April 2017, when its stock began trading again. 2017 performance since April: –9%.
What investors are missing: The trip through bankruptcy has allowed Peabody to trim $6 billion in debt and liabilities, creating a much stronger balance sheet. The company should benefit substantially from the Trump administration’s agenda to roll back former president Barack Obama’s bans on new coal leases on public lands. Peabody’s Australian coal mine exports will profit from Beijing’s recent decision to allow China’s coal-power-generation capacity to grow by as much as 19% over the next five years.
• Weatherford International PLC (WFT). The stock price of this oilfield-services company, which operates in 90 countries, has fallen 83% over the past three years, due to low oil prices and also because of behind-the-scenes corporate drama, including fraudulent accounting and the abrupt resignation of its CEO in 2016. 2017 performance: –24%.
What investors are missing: Weatherford recently signed a $2 billion deal with the Saudi Arabian government, which is seeking to solidify its commercial relationships with the US. New CEO Mark McCollum is expected to reduce the company’s debt and lower its costs of production after years of mismanagement. And although $50-per-barrel oil will continue to depress the growth of oilfield services, Weatherford’s strongest market positions are in the most profitable areas of the business, including directional drilling equipment that can extend through miles of nonvertical bedrock with great precision.
Source: George Putnam is a former corporate bankruptcy attorney and a trustee for Putnam Investments, a mutual fund group with more than $100 billion in assets, Boston. He is founder and editor of The Turnaround Letter, which focuses on depressed stocks of companies that appear headed for a turnaround. Its model portfolio has produced annualized returns of 9.9% over the past 20 years, compared with 6.9% for the S&P 500. TurnaroundLetter.com
*Performance figures for one-year and 2017 returns are as of August 30, 2017.