Finding Q4 casualties: stocks with rally potential

A Wall Street adage warns, “Don’t try to catch a falling knife.” I do it frequently. Buying good stocks on bad news is a sound methodology, I believe. You may not catch the exact bottom, but you’re likely to find a good entry point.

Each quarter, I compile a Casualty List of stocks that have been knocked down in the quarter just concluded, and that I think have excellent rebound potential. For the most part, they have lived up to my expectations.

Of the four stocks newly inducted to my Casualty List, two are energy stocks. Here’s a rundown on the four new casualties.

Ovintiv

Ovintiv Inc. is an oil and gas producer based in Denver.

Ovintiv shares fell 7.04 percent last quarter, while the S&P 500 gained 11.69 percent. Figures are total returns including dividends.

I think Ovintiv can make decent profits if oils stays near $70 a barrel, strong profits if oil averages $80, and terrific profits if oil runs up to $100 — which I would expect if the Middle East conflict heats up.

This stock looks very cheap to me, at four times recent earnings and less than 1.0 times revenue.

Patterson-uti

Contract drillers don’t own land or the oil beneath it, but are paid for installing and operating wells. One leading driller is Patterson-uti Energy Inc., based in Houston. Oil service stocks like Patterson tend to be more volatile than producers such as Ovintiv.

After dropping 22 percent in the fourth quarter, it sells for 6.6 times earnings and 0.71 times revenue– dirt cheap, in my estimation.

Target Hospitality

Target Hospitality Corp. (TH) dropped more than 38 percent in the fourth quarter. The company, with headquarters in Woodlands, Texas, owns the Pecos Children’s Center,

which is a temporary home to children who have entered the U.S. illegally.

It also owns the South Texas Family Residential Center in Dilley, Texas, which houses adult immigrants awaiting processing or deportation. In addition, it offers temporary housing for oil-field service workers, and provides services to other customers, including housekeeping, catering and security.

The stock fell 38 percent in the fourth quarter. Analysts think the company’s revenue will fall to just under $400 million in 2024 from about $550 million in 2023. Adding to uncertainty, immigration policy is being hotly debated in Congress.

At six times recent earnings, I think Target Hospitality is a decent speculation.

Borgwarner

Down 11 percent in the fourth quarter, Auburn Hills, Michigan-based Borgwarner Inc. (BWA) makes auto parts, such as turbochargers, transmission parts and emissions systems.

The stock’s performance has been unremittingly lousy. Investors who got in 10 years ago have a loss. So do investors who bought the stock five years ago, three years ago and one year ago.

Why would I recommend such an underperformer? Well, to start with, Borgwarner has posted a profit in 14 of the past 15 years. Also, the stock has usually sold for close to 15 times earnings but its multiple now is 11, and it’s under eight based on analysts’ forecasts for 2024.

The Record

One-year returns can be calculated for 79 of my Casualty Lists, going back to 2000. The average one-year return has been 14.9 percent. That beats the average return for the Standard & Poor’s 500 Total Return Index, which has been 10.6 percent.

Only half of the columns have beaten the index, but 50 of the 79 have been profitable.

My selections from one year ago were disastrous, as all four of my picks declined.