Pummeled Stocks for Brave, Contrarian Investors: John Dorfman
The rude market of the past month has knocked many stocks down to attractive levels. Investors who are brave -- and have a time horizon of one year or longer -- can find worthwhile bargains among them.
To take advantage of these opportunities, you have to put aside the fear now enveloping the market like smog. European debt problems, oil gushing in the Gulf of Mexico, heightened tension between North Korea and South Korea and the pending overhaul of U.S. financial laws have all fueled the downturn.
Value investors, as always, need a contrarian perspective, plus some guts. Here are six stocks that have been knocked down to appealing prices, in my view.
It’s been ages since I recommended a biotech stock, because I think most of them trade more on investors’ hopes than actual achievements. I like Gilead Sciences Inc., located in Foster City, California, now that shares are priced at about $36, down from about $46 in early April.
The world’s largest maker of AIDS drugs, Gilead also makes medicine to treat liver disease and cardiovascular and respiratory illnesses.
While some biotech firms are still groping for their first commercial products, Gilead had $7 billion in revenue last year, up from less than $1 billion in 2003. The company’s return on common equity, a measure of profitability, was stunningly good last year, at 49.5 percent.
Analysts expect Gilead to post record earnings in 2010 and again in 2011. Yet shares today sell for only 11 times earnings.
Sticking to Oil
Hess Corp. trades at about $53, down from more than $65 in late April. The New York-based oil and gas company has some operations in the Gulf of Mexico. Investors fear that drilling there will be curtailed, subjected to government red tape, or even prohibited.
Forget about prohibition, in my view. The nation needs the oil. Restrictions? Yes. New costs? Certainly. But I believe that Hess and its rivals will be able to pass along many of these costs to customers. At 14 times earnings and 0.5 times sales, it looks good to me.
A related play is McDermott International Inc., an engineering and construction company specializing in energy plants, including offshore oil platforms. The company is incorporated in Panama and has its main office in Houston.
All the stocks in the offshore drilling industry have dropped sharply in price since BP Plc.’s oil spill began on April 20. I think most of them are good buys now.
McDermott looks enticing to me at about $22, down from almost $29 in April. The current price works out to about 14 times earnings and less than one times sales.
Building Rigs
A risk to McDermott is that a moratorium on deep-water offshore oil drilling permits will last longer than the six- month period President Barack Obama recently called for. I think it is more likely that oil-rig building will resume, with additional safety measures. In 2011 and beyond, this could mean more revenue for McDermott rather than less, as its engineering expertise will be in demand.
Through its Babcock and Wilcox subsidiary, McDermott also builds and helps maintain nuclear-power plants. The company plans to spin off Babcock and Wilcox.
Turning from energy to agriculture, I like Bunge Ltd. The company processes soybeans, canola and rapeseed and says it is the world’s largest seller of bottled vegetable oils. It is also involved in sugar, ethanol, fertilizer and other aspects of agribusiness.
Appealing Price
White Plains, New York-based Bunge had almost $42 billion in sales last year. The market value of its stock is about $7 billion. That glaring discrepancy alone justifies buying the stock, in my view.
To sweeten the deal, analysts expect earnings to bounce back strongly this year and next, after a bad 2009. The consensus prediction calls for profits of $5.09 a share in 2010 and $6 in 2011, compared with $2.22 last year.
EBay Inc., which was an investors’ darling a few years ago, has sunk to about $21, from more than $27 in March. Shares of the online marketplace, with headquarters in San Jose, California, have lost their popularity. Yet I see much to like about the stock.
EBay is debt-free. Last year it earned a record profit of almost $2.4 billion -- about triple the company’s profit in 2004, when shares hit $58.
Low Debt
Apparel maker Guess? Inc. was selling for about $50 a share when the correction started. Now it looks a bit frayed at about $38. The Los Angeles-based company is losing its president and chief operating officer, Carlos Alberini. He is leaving to become co-chief executive officer at Restoration Hardware Inc., a furniture company although he will remain on the Guess board.
Nonetheless, Guess seems well positioned. Its debt is less than 2 percent of equity. In its latest fiscal year, Guess earned a sterling 27 percent on equity.
Disclosure note: I have no long or short positions in the stocks discussed in this week’s column. Personally and for clients, I own four offshore drilling stocks: Bolt Technology Corp., Oceaneering International Inc., Rowan Cos. and Transocean Ltd.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com.
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