When stocks are punished, it’s not always for a good reason.
That’s why I compile a quarterly Casualty List of stocks that have been banged up in the latest quarter and which I think have the potential to provide above-average gains.
On the whole, the Casualty List has been successful. My picks have average a 17.2% return over 12 months versus 10.5% for the Standard & Poor’s 500 Index.
That average is for 68 columns I wrote from 2000 through a year ago. Forty-four of my past sets of recommendations were profitable, and 35 beat the index.
Bear in mind that my column recommendations are hypothetical: They don’t reflect actual trades, trading costs or taxes. These results shouldn’t be confused with the performance of portfolios I manage for clients. Also, past performance doesn’t predict future results.
155% Return
When I compiled my Casualty List a year ago, the nation was in despair. The covid-19 pandemic raged furiously. Many states were in lockdown. Theaters, gyms and restaurants were closed.
In retrospect, that was a great time to buy.
My four picks from a year ago all doubled or more from March 30, 2020, through March 30, 2021. ViacomCBS Inc. (VIAC) led the pack with a 240% gain. Skyline Champion Corp. (SKY) chipped in 172%. Carnival Corp. (CCL) returned 108%, even though its ships were idled then and remain so today.
Cullen/Frost Bankers Inc. (CCR) had the “smallest” gain, 103%. Meanwhile, the S&P 500 Index advanced 53%. All figures are total returns, including dividends.
It’s time now for new picks, involving stocks that have been roughed up in the first quarter. The market has swung from despair to near-euphoria, so don’t expect these to do as well as the ones from a year ago. My hope, though, is that they will beat the market over the coming year.
Sage Therapeutics
Based in Cambridge, Mass., Sage Therapeutics Inc. is an early stage biotechnology company. It has a drug on the market (Zulpresso) to treat post-partum depression, and is working on bipolar disorder, anxiety disorder, tremors, and other diseases.
Although it is a fledgling company, Sage has a joint arrangement with Biogen. Revenue last year was $1.1 billion, and the company showed a profit for the first time, after six years of losses.
Sage’s balance sheet is strong, with debt only 1% of stockholders’ equity. The company has $2 billion in cash and marketable securities, vastly more than its debt.
Obviously, everything depends on clinical success for its drugs, most of which are still in clinical trials. Analysts think the pipeline looks promising. Of 15 analysts who follow the company, 14 call the stock a “buy.”
Shares fell 15% in the first quarter. The company’s revenue comes in chunks, and is expected to be down sharply this year.
Lumber Liquidators
Down 17% in the first quarter was Lumber Liquidators Holdings Inc. (LL), which sells flooring from 410 stores and on the web. This is a risky pick, since the company lost money for four years straight in 2015 through 2018. It has righted the ship, however, and is doing extremely well lately.
One could argue that the company’s recent success, with a 31% return on stockholders’ equity in 2020, is a fluke. People have been stuck at home and naturally want to spruce up their homes.
I suppose that critique is partly true. But the stock is selling for less than 13 times earnings in a market where the prevailing multiple is about twice that. On balance, I think the risk/reward ratio is favorable.
Perdoceo Education
Nicked for a 5% loss in the March quarter, Perdoceo Education Corp. (PRDO) is the parent to Colorado Technical University and American InterContinental University. No one will mistake these institutions for Harvard or MIT, but they offer online and in-person classes to about 42,700 students.
You may remember this company as Career Education Corp. It changed to its present name a little over a year ago. It has had regulatory disputes with the Securities and Exchange Commission, the Federal Trade Commission and the U.S. Department of Education.
Why might you want to invest in a company whose reputation is tarnished? Well, in my opinion, it caters to a genuine need. And the stock has already been punished the company’s past misdeeds: It sells for a paltry seven times earnings.
Democratic politicians often advocate stricter regulation of for-profit schools, and the Biden administration may get around to it. Ultimately, I think that would benefit the schools, by enhancing the value of the degrees they offer.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Mass., and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached via email.
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