Jubak's Journal
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Indiscriminate selling creates 3 bargains
Electronic Arts, Whirlpool and Hovnanian watched their stocks fall after competitors discovered problems. But they're still solid companies. Also, here's a performance report on my CNBC picks.
By Jim Jubak
Sell em all, Wall Street typically yells when one company in a sector announces bad news. The fear is that the bad news will prove contagious.
Sometimes thats the case. In those situations it is indeed a good idea to simply get out of the way before the avalanche hits your portfolio.
Sometimes, however, it isnt. In these situations the bad news is limited to a specific company. Then the indiscriminate selling of everything in the sector turns out to be an opportunity to pick up the best stocks in a group at a bargain price.
Ive found three recent examples where company-specific bad news from one of a sectors weakest players has hammered the strongest stock in a sector as well, creating a buying opportunity.
A star is born
Electronic Arts (ERTS, news, msgs) is the star of the electronic gaming sector. Its the only company in the sector that has managed to create a portfolio of titles that guarantees a reasonably stable cash flow instead of the hit-and-miss cycle of smaller companies that go from boom to bust depending on their ability to produce one quarters hot title.
Take-Two Interactive Software (TTWO, news, msgs) is the mirror image of Electronic Arts: The companys fortunes are tied to the success and publication cycle of its hit franchise "Grand Theft Auto." The next version of that game, "San Andreas," is due out in October. In the meantime, Take-Two on June 8 reported a loss for its April quarter of 33 cents a share, which was a huge 19 cents a share worse than the company had told Wall Street to expect. The company blamed the miss on marketing and production delays that pushed the introduction of a number of new titles to later quarters. It was definitely company-specific bad news.
By contrast, Electronic Arts has been telling Wall Street that the newest version of its Harry Potter game, coordinated to the release of the newest Harry Potter movie, has shipped in versions for all game platforms and is selling strongly. Electronic Arts has a good shot at beating Wall Street's consensus earnings estimate of 5 cents a share for its June quarter, historically the companys weakest.
The stock is trading at 26 times earnings estimates for fiscal 2005, which is low end of its historical range of 25 to 30 times forward earnings per share.
Stepping up the pace
Whirlpool (WHR, news, msgs) has managed to turn itself into a global appliance maker and marketer that thrives on a combination of low-cost production and rapid product innovation. The company isnt resting on its laurels either: Whirlpool introduced 25 new products in the last three years and is working to step up the pace by introducing 22 new products this year.
Just in case anybody was starting to think this was easy, competitor Maytag (MYG, news, msgs) on June 4 cut its estimate for 2004 earnings per share to $1 to $1.10 from its earlier range of 90 cents to $2. Maytag is getting slammed by its high cost structure, partly a result of its smaller size, that's making it tough for the company to fend off competition from Asia and price pressure from retailers. And Maytags problems seem to be getting worse. Despite repeated restructurings, the company continues to lose market share in refrigerators, dishwashers and especially in its Hoover vacuum line.
Whirlpool at just about the same time reaffirmed its guidance of 7% earnings per share growth for 2004. Maytag, which is projecting a 10% drop in 2004 earnings per share, trades at a 11.6 times projected 2004 earnings, a 9% premium to Whirlpools price-to-earnings ratio on projected 2004 earnings.
Lumping the strong with the weak
Hovnanian Enterprises (HOV, news, msgs) shares have dropped from their March high of $45 to a recent $35 because everyone knows that higher interest rates arent good for homebuilders. But that conventional wisdom is lumping the strong players like Hovnanian with the sector's weaker members.
Hovnanian has a national footprint, so its fortunes arent tied to one or two local real estate markets. Its able to tap the financial markets for capital, which lowers its cost of funds and gives it the flexibility to offer low-cost mortgages that will keep buyers coming in even as yields on 10-year Treasurys tick up toward 5%. Its size in the still-fragmented homebuilding industry also gives it a cost advantage over smaller competitors.
All these strengths were highlighted by the bad news from Dominion Homes (DHOM, news, msgs), which on June 7 reported a drop of 35% net sales in April and May from the same period in 2003. Dominion does business in just two markets, Ohio and Kentucky, and is dependent for its financing on the higher-cost short-term debt market. It does 75% of its business with first-time home buyers.
After tumbling along with Dominion Homes, Hovnanian trades at just 6.5 times estimated 2004 earnings per share. Investors may not want to own homebuilders for the long term if rates spike toward 6%, but with the valuation this low, the better stocks in the sector seem ripe for a trade.
These three stocks are the 53rd, 54th, and 55th that Ive recommended on CNBC since Jan. 16, when I began a regular appearance on "Morning Call" each Wednesday at 11:20 a.m. ET. So it seems like time to report on the results for those first 52 stocks.
As of the close on June 15, 32 of those picks were up from the closing price on the day I recommended them and 20 `were in the red. The average return for the entire group of 52 was 1.6%. Thats pretty meager on an absolute basis but better relative to the major indexes like the Standard & Poors 500 stock index, down 1% for the period, and the Nasdaq, down 7%.
| Jubak's CNBC picks | | Name | Recommended price | Recommended date | Return | | CARBO Ceramics Inc. (CRR, news, msgs) | 50.83 | 1/16/2004 | 36.8% | | PETsMART (PETM, news, msgs) | 25.48 | 3/10/2004 | 24.9% | | Rogers Corporation (ROG, news, msgs) | 55.29 | 4/21/2004 | 20.6% | | Maverick Tube Corporation (MVK, news, msgs) | 20.94 | 5/19/2004 | 19.1% | | Labor Ready (LRW, news, msgs) | 12.68 | 4/28/2004 | 15.2% | | The Toro Company (TTC, news, msgs) | 62 | 3/31/2004 | 13.7% | | Universal Compression Holdings (UCO, news, msgs) | 26.93 | 1/16/2004 | 13.4% | | Schlumberger Limited (SLB, news, msgs) | 53.89 | 1/16/2004 | 11.2% | | Southern Peru Copper ADR (PCU, news, msgs) | 29.95 | 5/5/2004 | 10.4% | | Veritas DGC (VTS, news, msgs) | 18.31 | 5/19/2004 | 9.2% | | Wolverine World Wide (WWW, news, msgs) | 23.26 | 3/10/2004 | 8.6% | | Thomas & Betts Corporation (TNB, news, msgs) | 24.21 | 5/26/2004 | 8.1% | | Nucor Corporation (NUE, news, msgs) | 64.6 | 5/26/2004 | 7.6% | | Inco Limited (N, news, msgs) | 30.73 | 5/5/2004 | 7.1% | | Robert Half International (RHI, news, msgs) | 28.04 | 4/28/2004 | 5.6% | | Canadian Natural Resource (CNQ, news, msgs) | 26.93 | 3/24/2004 | 4.8% | | Portfolio Recovery Associates (PRAA, news, msgs) | 25.3 | 5/26/2004 | 4.5% | | Commercial Metals Company (CMC, news, msgs) | 29.46 | 5/26/2004 | 3.8% | | Watsco (WSO, news, msgs) | 25.99 | 5/19/2004 | 3.6% | | PACCAR (PCAR, news, msgs) | 53.17 | 5/19/2004 | 3.5% | | Applied Industrial Technologies (AIT, news, msgs) | 27.35 | 6/9/2004 | 3.4% | | Manpower (MAN, news, msgs) | 47.68 | 4/28/2004 | 3.0% | | Deere & Company (DE, news, msgs) | 66.97 | 6/9/2004 | 2.5% | | Eaton (ETN, news, msgs) | 59.97 | 6/9/2004 | 2.4% | | Rayovac (ROV, news, msgs) | 25.75 | 3/10/2004 | 2.4% | | Thor Industries (THO, news, msgs) | 28.55 | 6/2/2004 | 2.0% | | Cooper Tire & Rubber (CTB, news, msgs) | 21.55 | 6/2/2004 | 1.6% | | The Middleby Corporation (MIDD, news, msgs) | 57.41 | 5/19/2004 | 1.0% | | Phelps Dodge (PD, news, msgs) | 67.5 | 5/5/2004 | 0.9% | | Peabody Energy (BTU, news, msgs) | 48.5 | 5/5/2004 | 0.8% | | Monsanto (MON, news, msgs) | 34.82 | 6/2/2004 | 0.2% | | Alcoa (AA, news, msgs) | 31.12 | 5/5/2004 | 0.1% | | Stein Mart (SMRT, news, msgs) | 14.27 | 6/9/2004 | -0.8% | | FMC Corporation (FMC, news, msgs) | 41.24 | 6/2/2004 | -0.9% | | Potash/Saskatchewan (POT, news, msgs) | 87.74 | 6/2/2004 | -1.2% | | Perrigo (PRGO, news, msgs) | 18.96 | 3/10/2004 | -1.5% | | Chico's FAS (CHS, news, msgs) | 44.46 | 4/21/2004 | -1.7% | | Oshkosh Truck (OSK, news, msgs) | 54.07 | 4/21/2004 | -1.7% | | Southwest Airlines (LUV, news, msgs) | 15.69 | 5/26/2004 | -1.8% | | Arrow Electronics (ARW, news, msgs) | 27.22 | 6/9/2004 | -1.9% | | Suncor Energy (SU, news, msgs) | 26.51 | 3/24/2004 | -4.0% | | Gevity HR (GVHR, news, msgs) | 26.36 | 4/28/2004 | -5.0% | | Weyerhaeuser (WY, news, msgs) | 65.16 | 3/2/2004 | -7.3% | | Administaff (ASF, news, msgs) | 17.49 | 4/28/2004 | -7.5% | | Central Parking (CPC, news, msgs) | 20.08 | 3/31/2004 | -9.2% | | TransCanada (TRP, news, msgs) | 21.74 | 3/24/2004 | -9.4% | | The Pep Boys (PBY, news, msgs) | 28.5 | 4/21/2004 | -14.2% | | Mohawk Industries (MHK, news, msgs) | 82 | 3/10/2004 | -14.4% | | MTS Systems (MTSC, news, msgs) | 25.93 | 4/21/2004 | -15.5% | | Audiovox (VOXX, news, msgs) | 18.54 | 3/31/2004 | -18.7% | | Compania Val Do Rio Doce (RIO, news, msgs) | 60.09 | 3/2/2004 | -23.3% | | GrafTech International (GTI, news, msgs) | 13.8 | 3/2/2004 | -31.5% | | | | | | Average gain/loss | | | 1.55% | | Number of gaining/losing positions | | | 32/20 | | Return on S&P 500 index ($INX) since 1/16/04 | | | -1% | | Return on Nasdaq ($COMPX) since 1/16/04 | | | -7% |
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First portfolio pick was on 1/16/04
Ill be reporting on the performance of these picks on a continuing basis. Please note that these picks are intended for the relatively short-term, say six months or so. In line with that time horizon, and to keep the list from getting too long to handle, Ill automatically sell each pick after six months. Future performance reports will be based on that assumption.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak did not own shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
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