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14 turkeys that could fly in 2005
Some companies are bad and theres no reason to buy their shares. Others are being fixed and offer opportunity. These 14 have potential, and one may well be a no-brainer.
By Jon D. Markman
As investors gather for the holidays, they can be thankful to corporate America this year for delivering a bounty of golden turkeys to consider for their 2005 dining pleasure.
Some of the worst stocks of one year, my research shows, do very well in the following year as inept managers are thrown out and botched strategies are abandoned. And because these stocks are surrounded by a thick fog of distaste and skepticism, there is usually plenty of time for risk-taking traders to take advantage of their recoveries early on.
How can you tell the difference between the turkeys that will find their wings and fly and the ones bound to remain firmly on the ground?
An awful-looking company may be a buy -- but not always
It isnt easy, as it is very often only at the moment of maximum pain that boards of directors finally face up to their failure. Those moments are sometimes a crucible for future success, but, at the same time, they are excessively investment-repellent. In other words, stocks are often at their best when they look their worst.
The Texas-based utility TXU (TXU, news, msgs), one of the years top-performing stocks, saw its fortunes turn around in mid-October 2002, a few days after slashing its dividend and announcing that it would trail analysts estimates for fiscal 2002 and 2003. Who would want to buy on a day like that? In the 45 days from Sept. 1, 2002, to that mea culpa on Oct. 15, 2002, TXU shares had fallen 74%. It looked like the company was on the ropes.
Since then, however, TXU is up 472% compared with a gain of 33% for the Standard & Poors 500 Index ($INX). It has gained far more than such glamour stocks as Starbucks (SBUX, news, msgs), up 150%, and eBay (EBAY, news, msgs), up 242%. This year, it is the leading stock in the S&P 500. Its 165%-plus gain through last Friday slightly bests the 162% gain of computer software maker Autodesk (ADSK, news, msgs).
Of course, not all one-time disasters turn out so well. Southeastern grocer Winn-Dixie Stores (WIN, news, msgs), the smallest stock in the S&P 500 these days, sank 45% in 1999, 15% in 2000, 23% in 2001, had a brief 8% recovery in 2002, then plunged another 34% in 2003 and 60% this year. The company announced it would restructure in April, and many value buyers have remarked that its real-estate is worth a ton by itself. But this employer of 90,000 people just cannot seem to find a way to match up against Wal-Mart Stores (WMT, news, msgs).
Related news and commentary on MSN Money
With comparable store sales down quarter after quarter, drastic action must eventually be taken -- so keep an eye out over the next 12 months for the sort of extreme event that could finally catalyze a long-sought up cycle for Winn-Dixie. My guess is that it will get kicked out of the S&P 500 in 2005 amid rumors of imminent bankruptcy. The stock would probably rebound soon after the ensuing washout -- so long as bankruptcy is ultimately avoided and a realistically drastic restructuring plan set in place.
Can Merck or Marsh & McLennan take flight again?
The most obvious grounded big-caps with potential to fly in 2005 are drug-maker Merck (MRK, news, msgs) and insurance broker Marsh & McLennan (MMC, news, msgs).
Both have undergone the extreme wipeout required of potential turnaround stories -- Merck over the recall of its flawed analgesic Vioxx, Marsh over accusations from the New York attorney general that its commission structure had violated state fraud laws. Each now sports a whopping 5% dividend yield. Yet only Marsh appears to have faced its mistakes with any candor. Merck, in contrast, still mostly protests it has done nothing wrong.
Of the two, my model suggests that Marsh has more recovery potential. But after being forced to give up three-quarters of its earnings and having its corporate credibility questioned, its still unclear how its vilified special-commission income will be replaced and whether customer and federal lawsuits will dog it for months to come.
In other words, count me as too chicken to buy into either of these turkeys yet. Instead, I would propose taking a somewhat conservative approach to year-over-year turnarounds and consider the worst-performing stocks in the S&P 500 with the best MSN Money StockScouter scores. Here they are:
| The worst S&P 500 stocks with high StockScouter ratings | | Company | % Chg YTD | StockScouter rating | % Chg Qtr. | Nov. 22 close | | QLogic (QLGC, news, msgs) | -33.6 | 9 | 38.3 | $35.10 | | Siebel Systems (SEBL, news, msgs) | -28.8 | 9 | 28 | $10.08 | | KLA-Tencor (KLAC, news, msgs) | -21.6 | 10 | 22.3 | $45.74 | | American Power Conversion (APCC, news, msgs) | -16.0 | 9 | 19.8 | $20.56 | | National Semiconductor (NSM, news, msgs) | -16.0 | 9 | 17.1 | $16.55 | | Xilinx (XLNX, news, msgs) | -16.2 | 9 | 15.3 | $32.41 | | Hewlett-Packard (HPQ, news, msgs) | -12.6 | 8 | 10.9 | $20.20 | | Paychex (PAYX, news, msgs) | -11.3 | 8 | 10.1 | $33.53 | | Intuit (INTU, news, msgs) | -17.8 | 8 | 5.7 | $43.25 | | Broadcom (BRCM, news, msgs) | -10.1 | 9 | 1.3 | $30.80 | | Ford Motor (F, news, msgs) | -11.6 | 8 | 0.3 | $14.09 | | State Street (STT, news, msgs) | -14.4 | 8 | -1.6 | $44.77 | | Maxim Integrated (MXIM, news, msgs) | -14.1 | 8 | -6.8 | $42.65 | | Dana (DCN, news, msgs) | -11.0 | 9 | -11.5 | $16.87 |
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All of these are down at least 10% for the year, or a minimum of 15 percentage points worse than the S&P 500 itself, yet all are rated 8, 9 or 10 by StockScouter, which means the stock-rating system considers them good bets to outperform the market over the next six months. Most are up substantially in the past month following the election relief rally.
The whole list will probably outduel the broad market over the next six months, but the real sport is in picking a couple that will lead the pack. The first three look terrific from a technical, or chart, perspective. KLA-Tencor (KLAC, news, msgs), which makes semiconductor manufacturing equipment, has just crossed up over long-term resistance to make a new recovery high on the strength of a very strong first-quarter earnings report. Enterprise software maker Siebel (SEBL, news, msgs) is also muscling up above resistance, as is data-storage networking device maker QLogic (QLGC, news, msgs). The next nine names on the list are struggling, so while they might work out over the next six months, their near-term prospects are limited.
Pick an M
Perhaps the most interesting stock on the list, however, is major analog semiconductor maker Maxim Integrated (MXIM, news, msgs). The price is currently the same as it was in late 2002 during the middle of the second down wave in chip sales. Maxim, one of the blue-chip semiconductor makers, appears to be under accumulation as investors are biding their time while inventory is worked down at customer warehouses across the world. In the next up cycle, which could start as soon as the second quarter of next year, analog chip makers should do very well -- and I think Maxim, whose products are used in everything from wireless handsets to automotive and medical devices, will be a leader again.
Cash flow, revenue and earnings growth are all outstanding, and the valuation is not outrageous. Maxim, furthermore, is one of the few technology stocks that have advanced in all but one of the past 10 calendar years. (It sank 37% in 2002.) It is on track to lose 10% this year, but, if my fundamental and technical models are correct, Maxim has the potential to find its wings in 2005 and get to $60 by December of next year. That would be a 40% gain.
So here we have an interesting value-investing dilemma. Which of the following three M's in health care, financial services or tech do you think will do best over the next 12 months: Merck, Marsh & McLennan or Maxim? Send me your response via email here, along with your reasoning, and Ill publish the best answers in a future column. Put MMM in the subject field.
Fine Print
To learn more about Maxim Integrated, click here. Click the choose application drop-down menu on that page to see the wide variety of products that the company sells its chips into. . . . To learn more about Marsh & McLennan, click here. Press releases like this one show how new management is trying to get the past troubles in the rear-view mirror. Thats a good first step for emerging from such a hard decline. . . . To learn more about Merck, click here. Its response to a piece in the British science journal The Lancet that was critical of Vioxx is posted here.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, he held positions in the following stocks mentioned: Autodesk, Starbucks.
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