Not every stock that gets roughed up deserves it.
Finding stocks that have been banged around, and that have good recovery potential, is the point of my quarterly Casualty List. This year's first quarter saw healthy gains for most stocks but some stocks took it on the chin.
Four that I think are likely to bounce back are United States Steel Corp. (X, Financial), Humana Inc. (HUM, Financial), Universal Corp. (UVV, Financial) and G-III Apparel Group Ltd. (GIII, Financial).
U.S. Steel
Once the world's largest corporation, U.S. Steel (X, Financial) is now a mere mid-sized company, and the second-largest steel producer in America, behind Nucor Corp. (NUE, Financial). Its stock fell 16% in the first quarter.
In late 2023, the company agreed to sell itself for about $15 billion to Nippon Steel (TSE:5401, Financial), the largest steel company in Japan. That price tag was almost double what Cleveland-Cliffs Inc. (CLF, Financial) had offered in mid-2023.
But President Biden said last month that it is “vital for it to remain an American steel company.” Former President Donald Trump also opposes the takeover.
That leaves the company's future in doubt. I think it probably will be sold sometime in 2025 or 2026, after the U.S. election is over. Be that as it may, let's assume that the company remains independent.
The stock, at about $41, sells for 12 times earnings. Profitability is mediocre, but the company has posted three straight annual profits. The debt—to-equity ratio is pretty good, at 39%. All in all, this looks like a moderate gainer to me, and more if a takeover happens.
Humana
Down a whopping 24% in the first quarter, Humana Inc. (HUM, Financial) is one of the largest health insurance companies in the U.S. It specializes in insuring Medicare and Medicaid patients and people in the military.
One problem was a massive cyberattack in February that disrupted the flow of billions of dollars in the health care industry. But even before that, Humana shares were weak as the company said it couldn't cut costs fast enough to maintain profits amidst rising health care costs.
Humana posted a loss in the fourth quarter of 2023. However, it has shown a profit for 24 years in a row, and I believe it can right the ship.
The stock sells for 41% of per-share revenue. If it can get back to the median ratio for the past decade (64%), the stock would rise from the current $347 to about $540.
Universal
I would like it if everyone in the world stopped smoking tomorrow. But of course that won't happen. There is a gradual diminution in tobacco smoking. According to Statista, 5.80 billion cigarettes were smoked worldwide in 2009, but only 5.10 billion in 2020.
Universal Corp. (UVV, Financial), based in Richmond, Virginia, sells leaf tobacco to cigarette makers. Over the past decade its revenues are close to flat, increasing at a rate of 0.6% per year. The stock market is in love with growth, so investor interest in Universal is sparse.
The stock was down 23% in the first quarter. But it's a good dividend payer, offering a 6.10% yield. It has increased its dividend each year for 54 years.
G-III
G-III Apparel Group (GIII, Financial) makes clothing under many brands, notably Calvin Klein, DKNY, Donna Karan, Karl Lagerfeld and Tommy Hilfiger. The “rag trade” is notoriously difficult, but G-III has shown a profit in nine of the past 10 years.
The stock declined more than 13% in the first quarter, bringing its price-earnings ratio down to about 8, which I consider bargain territory. Over the past decade, the median ratio for this stock has been about 17.
Track record
I've been compiling the Casualty List since mid-2000. One-year returns can be calculated for 80 lists. (The one you're reading is number 84.)
My picks from a year ago were egregious, dropping 8.97% while the Standard & Poor's 500 Total Return Index soared 29.40%. My biggest sin was picking First Republic Bank (FRCB, Financial), which failed and was taken over by J.P. Morgan Chase & Co. (JPM, Financial). The stock plummeted more than 99%.
Over the years, though, the Casualty List has been a good source of investment ideas. The average 12-month return on my selections has been 14.57% compared to 10.81% for the S&P 500.
Fifty of the 80 lists have shown a profit, but only 39 lists have beaten the index.
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.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts. He or his clients may own or trade securities discussed in this column. He can be reached at [email protected].
