We've rarely seen such symmetry in stocks. In the first quarter
of 2012, stocks zoomed ahead, almost to the very day that the
quarter ended. Indeed, the S&P 500 hit its high mark for the
year in the first trading session of the second quarter, and has
been on the down slope ever since.
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At this point, it's hard to understand that the major indices
are actually higher than when the year began. It still seems like
it's been a lost year. Still, for a number of individual stocks,
the warm memories of the first quarter are long gone. More than 100
of stocks in the S&P 400, 500 and 500 are down more than 25% in
the second quarter, and 28 of those are off more than 40% -- in
just one quarter!
Unfortunately, it may be quite a few quarters until some of
these stocks are able to regain some of the lost ground. Once a
stock falls out of favor, it can stay out of favor as burned
investors steer clear. Yet as I combed through the list of
second-quarter, I spotted some real bargain stocks that might snap
back in short order.
Take a look at this list of some of the second quarter's big
losers...
Steer clear of retail
Other
laggards
such as fast-sinking retail stocks may stay out of favor for the
rest of this year, even if they hold solid long-term upside. As a
result, you may want to steer clear of
Coldwater Creek (Nasdaq:
CWTR
)
,
Quiksilver (
NYSE
: ZQK)
,
Fossil (Nasdaq:
FOSL
)
and
Office Depot (NYSE:
ODP
)
, all of which have fallen more than 40% in the second quarter.
I've recently touched on other stocks that have fallen 40% or
more in the second quarter that have solid rebound potential,
including
Allscripts (Nasdaq:
MDRX
)
. [
Read that article here
.]
I also recently suggested that
Take-Two Interactive (Nasdaq:
TTWO
)
and
Polycom (Nasdaq:
PLCM
)
were potential 100% gainers for patient investors
in this article
.
Looking for value in the oil patch
The sharp plunge in natural gas prices over the past 18 months, and
the more recent drop in oil prices, has led investors to reduce
their exposure to the energy sector quickly. A number of key stocks
fell 25% or even 30% in the second-quarter, with
Forest Oil (NYSE:
FST
)
,
Swift Energy (NYSE:
SFY
)
and
PDC Energy (Nasdaq:
PETD
)
all falling more than 40% in just the second-quarter.
A rebound in these stocks will only come when energy prices firm
up. Until then, their quarterly results may continue to weaken as
hedges for future energy sales start to wear off and results
reflect current lower energy prices. That's why I'm focusing on
another industry play that isn't directly exposed to the underlying
commodity
prices. It's off 47% in the second quarter, but is now shaping up
to be a clear value play.
Basic Energy (NYSE:
BAS
)
, which has more than $1.2 billion in annual sales, provides a wide
range of equipment that energy drillers use, from the rigs
themselves, to all of the tankers and other trucks that are used
around a drilling site.
The recent fall in energy prices is crimping demand and pricing
somewhat, which can be seen in quarterly
profit
results.
Earnings
fell from $0.66 per share in the third quarter of 2011 to $0.58 per
share in the fourth quarter to $0.50 per share in the first quarter
of 2012. Analysts expect earnings to keep sliding in the near-term,
to around $0.40 per share by the fourth quarter. That works out to
be an annualized rate of $1.60 per share, which is a clear drop
from the $1.87 a share earned in 2011.
Still, does that justify a downward move from the $37,
52-week high
to a recent $10? Put another way, should this stock deserve to
trade at its current multiple of three times projected 2012
EBITDA
?
Insiders don't think so. They started buying
shares
in late March when the stock had fallen to $17, and they've been
buying at ever-lower levels since then. In all, these insiders have
snapped up $5 million in stock.
Still, it pays to see how companies like this perform throughout
a cycle to be sure that results won't turn disastrous. Basic Energy
appears to hold up well regardless of strong or weak energy prices.
The company has delivered positive
free cash flow
in five of the past six years (at an average of $55 million in
positive free cash flow per annum). The only down year, 2010, saw
negative free cash flow of just $14 million. Despite the current
challenges, management believes the company will generate solid
free cash flow this year as well. Though that 52-week high of $37
seems like a stretch, there's no reason this stock can't bounce
from a recent $10 back to $15 or even $20 once quarterly results
stabilize, perhaps by year-end.
Risks to Consider:
These stocks, as a group, may remain out of favor until they
can deliver a series of solid quarters.
Action to Take -->
Many investors avoid these stocks because they lack
timeliness
, but some look so sharply oversold that value investors will
likely start buying before the growth crowd returns. Basic Energy,
along with the other stocks noted above, should be on your list of
stocks for further research right now, before the snapback
comes.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.