Like Brittny Griner, the U.S. basketball star who was imprisoned in Russia last year, stocks are sometimes punished out of all proportion to whatever they did wrong.
Such stocks are good candidates for a comeback, and that’s the idea behind my quarterly Casualty List. It contains stocks that have been smacked down in the latest quarter and that I believe will rise again.
Beginning in 2000, the stocks on my Casualty List have produced an average 12-month return of 15.5%, beating the average return of 10.3% for the Standard & Poor’s 500 Total Return Index over the same periods.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
In the first quarter this year, energy stocks were battered, as the price of a barrel of oil -- which had been over $100 last summer -- slid from $84 to $73. My best guess is that oil will spend most of the next five years at $80 a barrel or more, so I’m sweet on oil stocks.
For my latest Casualty List (the 80th), I’ll lead off with Patterson-UTI Energy Inc. (PTEN, Financial), a drilling company whose stock fell 30% in the first quarter. With seven losses in the past 15 years, Patterson is not as high-quality as the stocks I customarily recommend. But I think it’s a good bet now.
Patterson-UTI earned only 70 cents a share in 2022. But analysts look for $1.72 a share this year, and more than $2 a share in 2024 and 2025. If they’re right, the stock (at $11.70 on March 31) is selling for less than 7 times this year’s earnings.
Archer-Daniels
Far more consistently profitable is Archer-Daniels Midland Co. (ADM, Financial), a food-processing and commodities-trading giant that has made money in each of the past 30 years. It processes soybeans, corn, wheat and other commodities, and produces oils, corn-based sweeteners, ethanol and other food products.
A company is considered a “dividend aristocrat” if it has increased its dividend each year for 25 years or more. Archer Daniels qualifies and then some, with 50 straight years of dividend increases.
In the latest quarter, Archer Daniels stock fell 14%. Analysts think that the company’s blockbuster earnings of $7.71 a share in 2022 won’t be repeated in the next three years; they expect earnings to settle in the $6 to $7 zone.
CF Industries
CF Industries Holdings Inc. (CF, Financial), out of Deerfield, Illinois, is one of the larger fertilizer producers in the U.S. Fertilizer prices rise and fall with the price of natural gas, an important input. Lately the price has fallen, and so have the stocks. CF was down 14% in the first quarter. But the company has shown a profit in 14 of the past 15 years, and the stock looks quite cheap at 5 times earnings.
West Rock
With consumers headed back into stores, shares of WestRock Co. (WRK, Financial), which makes corrugated packaging, have fallen. Investors figure the days when everyone bought everything online are over.
That’s true, but I still think there’s a long-term trend for people to do a lot of their shopping online and have the goods delivered to their doorstep. So I like WestRock, which fell 13% in the first quarter, and sells for 10 times earnings.
First Republic
As a speculation, I recommend First Republic Bank (FRC, Financial), raked for an 88% loss in the first quarter. Investors see it as particularly vulnerable to a bank run because it has a lot of large deposits not fully covered by federal deposit insurance.
I’m prejudiced in this bank’s favor, having personally banked there for more than a decade. The customer service was the best I’ve experienced at any bank.
Alas, I don’t expect First Republic to continue as an independent company for much longer. I think regulators will gently prod another bank to take it over. My hope is that the takeover price will be north of the stock’s current price, which was $13.99 at the end of March.
Last year
My Casualty List from a year ago posted a 0.2% gain while the S&P 500 (including dividends) declined 8.8%. Lennar Corp. (LEN, Financial) and LKQ Corp. (LKQ, Financial) did well, rising 30% and 27% respectively.
Quest Diagnostics Inc. (DGX, Financial) posted a moderate gain, while Western Digital Corp. (WDC, Financial) and Stanley Black & Decker Inc. (SWK, Financial) were big losers, down 24% and 41%.
Of the 76 columns on which one-year returns can be calculated, 48 have beaten the S&P 500 and 28 have trailed the index.
John Dorfman is chairman of Dorfman Value Investments in Boston, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at [email protected].
