LUMPS OF COAL CAN BE 2018’S DIAMONDS
Laggards may attract bargain-hunting investors, says expert
SAN FRANCISCO
INVESTORS saddled last year with the market’s worst performers, including Under Armour and General Electric (GE), may do well to remember as December draws to an end that lumps of coal sometimes turn into diamonds.
As investment advisers rebalance clients’ portfolios in the final weeks of the year, the instinct to dump stocks that have been left behind in surging markets — or that fall out of favour with analysts — can be self-destructive.
With the S&P 500’s rally pushing price-earnings multiples to highs not seen since 2002, laggards overlooked by a rush to own technology and other highgrowth stocks may attract bargain-hunting investors heading into this year.
“A contrarian strategy of buying beaten-up names might have a good year,” said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York.
Ghriskey in recent months bought shares of GE, which has slumped 45 per cent this year as it struggles with a shift from coal and gas to renewable energy. He believes the 125-year-old conglomerate will claw its way back to growth, or might be split into multiple companies.
Some of the worst-performing stocks of 2016 roared back to life this year, including Vertex Pharmaceuticals and medical device maker Illumina. Those two companies this year have rebounded 69 per cent or more.
As he rebalances clients’ portfolios this month, Jake Dollarhide, head of Longbow Asset Management in Tulsa, Oklahoma, is investing more in Kroger Co and other supermarkets that took a beating after Amazon.com said in June it was buying Whole Food Markets.
Kroger has lost 20 per cent year to date and it recently traded at 14 times expected earnings, compared to its five-year average of 27. “Grocery is local; it’s not an Internet play. And Kroger has the footprint to not even notice that Amazon is around,” Dollarhide said.
Investors following the Dogs of the Dow investment strategy each year buy components of the Dow Jones Industrial Average with the highest dividend yield, betting that those stocks have been oversold. Those companies include Verizon Communications, International Business Machines and Exxon Mobil, all with dividend yields of 3.7 per cent or more.
Those three stocks were also Dogs of the Dow at the start of this year, and they have underperformed. But an investor following that strategy last December also would have bought Boeing, which has nearly doubled this year, Caterpillar, which is up 64 per cent, and Cisco Systems, which has risen 28 per cent.
Nike last year suffered a 19-per cent drop, making it the worstperforming Dow component. In the past 12 months, however, it has surged back with a 25 per cent rally.
Under Armour has slumped 48 per cent year to date, making it the S&P 500’s third-worst-performing stock. Last January, most analysts recommended buying Under Armour’s shares and none recommended selling. Now, most analysts are neutral on the yoga-pant pioneer. Bloomberg