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5 value stocks for a momentum market
Here are 5 stocks that the hot momentum players have dropped. But patient investors will reap the rewards.
By Jim Jubak
Momentum markets, such as the current one, create opportunities for investors willing 1) to buy on long-term fundamental value when momentum investors crush a stock and 2) to hold patiently until the stock market rewards that long-term fundamental value with a higher stock price.
In today's column, I'm going to name five stocks abandoned by the "mo' money" that will, in my opinion, pay off for patient investors, possibly as early as the end of 2006.
Stock markets that are ruled by hot money chasing momentum often, as in today's market, produce exaggerated price moves. For example, with crude-oil prices falling -- this week hitting their lowest levels since July -- the prices of transportation stocks have soared. Old Dominion Freight Line (ODFL, news, msgs) and Arkansas Best (ABFS, news, msgs), for instance, climbed 19% and 25% in the three weeks that ended on Nov. 8. At the same time, money rotating into transportation stocks rotated out of energy stocks, sending prices in that sector lower. Burlington Resources (BR, news, msgs) and EOG Resources (EOG, news, msgs), to name two examples, fell 15% each from the beginning of October to Nov. 8.
If this stock market is delivering that kind of plus-15%/minus-15% swing between sectors just on a shift in sentiment, think about the kind of punishment investors are dishing out to the stock's of companies that actually announce bad news, any kind of bad news.
Delayed action
Chicago Bridge & Iron (CBI, news, msgs), for example, announced on Oct. 26, after the markets had closed, that it would delay the announcement of third-quarter earnings scheduled for before the open on Oct. 27. The company didn't get very specific about the reason for the delay: "The Company's third-quarter results were not finalized in time to meet the original schedule," the company's press release said.
Investors hit the door running when the market opened on Oct. 27. And they kept running until the close of the market on Friday, Oct. 28. By that time, shares of Chicago Bridge & Iron had dropped 32% or $9.41 from the Oct. 26 close. That's a big hit in just two days. (It probably didn't help the company had already played coy with the earnings announcement, first saying that it would delay the report because of executive travel plans. And it certainly didn't help that the company's CFO had retired two weeks before the announcement.)
Related news and commentary on MSN Money
By Oct. 31, the company had added a few details about the delay. The company was investigating a memo from a senior member of the company's accounting department alleging improprieties.
Wall Street analysts put an estimate on the damage. Bear Stearns, for example, figured that the financial fallout would reduce earnings for the third quarter from 9 cents to 11 cents. There's no guarantee that the accounting problems flagged in the company's announcement are the end of the problem, of course.
But if the hit to earnings is something like that figure, the big drop in price is an opportunity to pick up these shares at a bargain price. Before the announcement, the stock traded at $29.52, and one brokerage, Hibernia Southcoast Capital, looking for an 18% gain over 12 months, put a target of $35 on the shares. At $29.72, the stock was trading at 31 times projected 2005 earnings per share. Not particularly expensive for shares of a company projected to grow earnings by 44% in 2005.
Look at what the hit to the stock price -- and to projected 2005 earnings -- did to return and risk, however. On Nov. 9, the shares traded at $23. If you reduce projected 2005 earnings by Bear Stearns high-end estimate of 11 cents a share, that's 27 times revised projected earnings for 2005. Cheap for a stock still projected to grow earnings by 39% in 2005.
You're not buying Chicago Bridge & Iron simply because it's cheaper than it was, however. You're buying the shares because you still believe the fundamental story behind this stock.
Chicago Bridge & Iron is a leading participant in the build-out of the global energy infrastructure. The company's backlog for projects jumped to $3.1 billion at the end of the second quarter of 2005, up from $1.5 billion at the end of the second quarter of 2004. Since that second quarter earnings report, the company has announced in excess of $270 million in new project awards.
4 more value picks
Chicago Bridge & Iron is the first of my five value picks for this momentum market. Here are the remaining four.
United Natural Foods. In my Sept. 13 column, I wrote about five great food stocks to buy if the post-hurricane chaos sent the price of any of them tumbling. Well, the price of United Natural Foods (UNFI, news, msgs), the country's biggest distributor of natural and organic foods, has certainly tumbled on news that earnings -- to be reported on Nov. 30 before the market opens -- would be off a few cents on rising fuel costs and on the departure of the current chief executive for personal reasons. After its tumble from $33.46 to a low of $27.64, a 17% drop, the stock had recovered to $29.19 by the close on Nov. 9. At that price, it was trading at 25 times projected earnings per share for the fiscal year that ends in January 2006.
Wall Street projects earnings growth of an average 18% a year for the next five years, and I think there's a good chance that figure is low. The natural and organic food segment is growing far faster than the grocery business as a whole, United Natural Foods has been picking up share, and the company's largest customer, Whole Foods Market (WFMI, news, msgs), has set its fiscal 2006 growth target at 18% to 21%.
United Natural Foods is a way to piggyback on Whole Foods' growth -- and that of the entire natural and organic sector, of course -- at a cheaper price. United Natural Foods trades at a price-to-earnings ratio of 29 (on a trailing 12-month basis), while Whole Foods Market trades at 62 times earnings. If you want to play it safe, you can wait until the company reports earnings on Nov. 30, but the stock looks like it has already started to recover from its recent drop.
First Marblehead. In all fairness, I can't blame this stock's fall on the current momentum market: First Marblehead's (FMD, news, msgs) decline dates back to March 4, 2005, when shares traded at $73.05. But today's market does seem to give the stock another kick in the ribs any time it starts to climb off the canvas.
For example, on Nov. 3, the stock plunged another $7.29 a share on news that Bank of America (BAC, news, msgs) would not automatically renew a contract for one part of its business with First Marblehead. As of the close on Nov. 9, the stock was down 63% from its March high. The stock market is worried that banks like Bank of America, which have been customers for First Marblehead's services in the private student loan market, will become competitors. I think that fear is overblown. First Marblehead continues to add new customers -- 20 last year -- and grew new loan volume by 30% last quarter.
It's probably worth waiting a bit on this one to see what Bank of America decides, although the stock's relative strength has moved up modestly but significantly recently. The recent news release just noted that the company would not automatically renew its contract with First Marblehead. This could be a negotiating ploy to get better pricing or, and this seems likely to me, it could be a sign that Bank of America is doing a complete top-to-bottom study of the profitability of going alone versus the profitability of using First Marblehead. A decision by Bank of America to go it alone would undoubtedly cause Wall Street to pummel First Marblehead again out of fear that this is a sign of things to come with other big clients.
I'm not sure that's true. Bank of America may be a special case because the bank recently purchased credit card powerhouse MBNA and seems anxious to find additional synergies to support the deal. First Marblehead recently confirmed its guidance for 25% to 30% earnings per share growth in 2005.
Chesapeake Energy. This stock was such a favorite during this year's energy rally that it shouldn't come as any surprise that it sold off more heavily than most other oil and gas stocks in the October profit-taking in the sector. Chesapeake Energy (CHK, news, msgs) shares were down 28% from Oct. 3 through Nov. 9. That larger-than-average drop -- most oil and gas stocks fell in the range of 15% -- for the shares is a reaction to the company's decision to aggressively increase its operational leverage to natural gas prices.
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