Losers one year can win next year

HE last shall be first,” it says in the book of Matthew. How often does that happen in the stock market?

According to a little study I performed, it happens about 44 percent of the time.

I studied the five worst-performing stocks in the Standard & Poor’s 500 each year, based on price change alone, and measured the total return, including dividends, the following year. This mini-study covered the worst losers of 2013-2017 and tracked results in 2014-2018. This year’s results are through Dec. 21.

Eleven of the 25 disgraced stocks in the study returned to grace in the following year, beating the market index.

The average total return for the scarlet-letter stocks was 8.7 percent, versus 8.1 percent for the market as a whole.

These results are close to a coin flip. So is there any reason to focus on the year’s biggest losers? Yes, there is.

Extremes

The big losers are often extreme performers the next year, for better or worse.

Perhaps you owned Vertex Pharmaceuticals Inc. (VRTX) in 2017, when it climbed 103 percent. Or maybe you were fortunate enough to enjoy a 95 percent gain in Freeport-McMoRan Inc. (FCX) in 2016.

Each of those stocks was among the biggest losers the year before.

You want to hear about the flip side? General Electric Co. (GE) fell 45 percent in 2017 and is down another 58 percent this year. Under Armour Inc. (UA) dropped 39 percent in 2016 and 50 percent in 2017. Twitter Inc. had back-to-back losses of 44 percent in 2014 and 35

JOHN DORFMAN

percent in 2015.

What this adds up to is this: It pays to scrutinize the list of big losers, but it’s a high-risk endeavor.

Let’s have a look at the five worst performers in 2018.

Coty

Coty Inc. (COTY), of New York City, sells about $9 billion of cosmetics a year. It lost money in fiscal 2017 and 2018. Its debt is more than $7 billion and has been climbing. The stock has fallen 68 percent this year.

In November, Camillo Pane stepped down as the company’s CEO, and Pierre Laubies, formerly with Mars Inc. and Jacobs Douwe Egberts (a coffee maker), stepped in. Laubies almost immediately bought more than $20 million in Coty stock.

Should you follow his example? I would wait for more signs of a turnaround.

General Electric

For a long time, I thought that General Electric Co. (GE, down 59 percent this year) was like a tangerine, easily divisible into slices with a value greater than the whole.

Alas, now it appears the company is so colossally mismanaged that it can’t get a grip on its problems.

Mohawk Industries

A carpet and rug manufacturer, Mohawk Industries Inc. (MHK) is based in Calhoun, Georgia. In addition to carpet, it makes tile, wood and other flooring. Sales have grown steadily, to about $10 billion, but profits peaked in 2017.

The stock is down 59 percent this year, as investors reason that higher mortgage rates mean fewer housing starts, which in turn means less flooring.

The damage seems excessive to me. I like Mohawk at the present price of about $113 a share and would buy it up to $120.

L Brands

Less than three years ago, a share of L Brands Inc. (LB) commanded $95. Today the price is about $25.

Mall-based stores are the heart of L Brands, including Victoria’s Secret, Bath & Body Works and La Senza.

While L Brands’ stock has shrunk, revenue has grown. As a result, the stock price is now only 0.5 times revenue, versus about 2.5 times revenue three years ago. Maybe it wasn’t a good value at the peak price, but now I find it attractive.

Perrigo

Based in Dublin, Perrigo Co. Plc makes generic drugs, baby formula, and hundreds of food and drug ingredients. The stock is down almost 58 percent this year. Sales and earnings are in their third consecutive year of decline. Profits are puny.

The stock sells for less than book value (corporate net worth per share) now. So I think it is more likely to rise than fall in 2019. But I’m lukewarm.

Past record

In Decembers past (20122017), I’ve written six columns touching on the year’s biggest losers. In those six years, I recommended only 13 stocks among the losers.

The average 12-month total return on the losers I’ve recommended has been 42.3 percent. That compares with 13.2 percent for the S&P 500 index over the same periods.

My losers beat the S&P only three years out of six, but it was by a wide margin when they did.

CityCenter has a new president and chief operating officer.

Steve Zanella will oversee daily operations of Aria and Vdara and will continue to provide oversight on corporate initiatives. Zanella has more than 25 years of experience with MGM Resorts International. He will assume his new responsibilities effective Jan. 1, subject to completion of applicable licensing requirements.

Destiny Thompson joined the GES Las Vegas office as an administrative manager. GES is a full-service Southern Nevada engineering firm focusing on geotechnical, environmental, materials testing and construction inspections.

Jon Raby, a veteran Bureau of Land Management land manager and leader, has been named state director in Nevada.

Raby will report to the BLM Nevada state office in Reno in early January.

Erika A. Albini joined The Shade Tree as director of development. The organization is a 24-hour shelter designed to meet the needs of women and children in crisis.

The Ladder appears Sundays. Submit announcements and photos to theladder@ reviewjournal.com for consideration.

Richard Drew The Associated Press A look at the five worst-performing stocks of 2013-2017 shows that the stocks rebound strongly about 44 percent of the time.