Starving in the midst of plenty, some stocks got roughed up in the fourth quarter even as the market rose.
Four of these stocks – CVS Inc., Gilead Sciences Inc., Owens & Minor Inc. and Argan Inc. – are on my Casualty List. It’s a roster I compile quarterly, containing stocks that have been wounded and that I think will recover.
This is the 59th Casualty List I’ve published since mid-2000. The average one-year gain on recommendations from the first 55 lists has been 19%, compared to 9.9% for the Standard & Poor’s 500 Index.
Of the 55 lists, 39 were profitable and 32 beat the S&P 500.
The Casualty List from one year ago did particularly well, returning 52.3%, versus 25.7% for the S&P 500 from January 17, 2017 through January 12, 2018.
Myriad Genetics Inc. (MYGN, Financial) spearheaded the advance with a 128% gain. Also moving up sharply were Akorn Inc. (AKRX, Financial), with a 58% return, and PVH Corp. (PVH, Financial), up 52%. My other pick, Hibbett Sports Inc. (HIBB, Financial), fell 28%.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
CVS
Since the S&P 500 was up 6.64% in the fourth quarter, I looked for casualties among stocks that were down more than 10%, or more than 16 points worst than the overall market.
One that I like is CVS (CVS, Financial), down 11% in the quarter. CVS a few years ago was a conventional drugstore chain, selling general merchandise (including cigarettes) along with health products and prescriptions. Today, the company devotes more space to health-related items, has ditched the cigarettes, and is trying to merge with Aetna Inc. (AET), a big health insurer.
Given the increasing creakiness of my (baby boom) generation, and the health consciousness of younger generations, I think CVS is well positioned. The stock sells for 15 times earnings in a market where the average stock fetches 23.
Gilead
I’ve been wrongly bullish on Gilead Sciences (GILD, Financial) in the past, but now that it has dropped 11% in the fourth quarter and sells for less than nine times earnings, I must say I find it attractive again.
This is, after all, a company that has grown its book value (corporate net worth per share) at more than 28% a year over the past decade. It’s a very profitable company, with a return on stockholders’ equity of about 55% in the past four quarters.
There are also negatives to Gilead. Revenue and earnings fell in 2017, and analysts expect another decline in 2018. Debt is almost 140% of stockholders’ equity. Sales of its leading hepatitis C drug have slowed way down as competition increases.
The big question for Gilead, as for many biotech firms, is whether the public, insurers and the government will continue to accept king-sized prices on new and promising drugs. Certainly, there is political pressure to keep these prices down, and President Trump has been among those urging price cuts.
On balance though, I like the risk-reward ratio here.
Owens & Minor
Only seven Wall Street analysts cover Owens & Minor (OMI, Financial) and not one recommends it. They are split between “hold” and “sell” ratings.
This friendless stock, which sold for about $35 a share at the end of 2016, now goes for about $21. It plunged about 35% in the fourth quarter. The company, based in Mechanicsville, Virginia, distributes medical and surgical supplies.
Are things really so bleak? Analysts predict $2.20 per share in earnings this year, which would be a record. And they expect 2019 to be better. If their estimates are right, the stock is selling for only about nine times 2018 earnings.
Argan
Argan (AGX, Financial) builds powers plants, primarily natural-gas-fueled ones. It could benefit from the long-term trend for gas power-generation facilities to replace coal-fired plants.
Growth the past few years has been excellent. However, the pipeline of future projects is skimpy, and management in a recent call hinted that there may be no near-term solution to that problem.
That was enough for investors to slam Argan for a 33% loss in the fourth quarter. I think the decline is a bit of an overreaction. And there are two things I like about the stock. It carries a 2.2% dividend yield, and the company is debt-free.
Disclosure: I own Argan, Gilead Sciences, and Myriad Genetics for some of my clients. At present I don’t own them personally.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].
