Barring a year-end shocker, 2010 will go down as a good year for
stocks. The S&P 500 is up more than 10% this year, and roughly
75% of stocks in theindex are in the black in 2010. Of course, the
other 25% would like to get past 2010, especially those that have
been hit hard.
I went rummaging through the dustbin of S&P 500 losers and have
found a few intriguing rebound candidates for 2011.
A few of these names will be familiar to our readers. I
that grocery chain
looked far too cheap, especially when compared to other industry
I also continue to think that
Office Depot (NYSE:
is once again
finding its footing
, and should close some of the valuation gap with rivals
H&R Block (NYSE:
The price-to-earnings (
) ratio on this tax prep firm really gets your attention. But few
would argue for a higherearnings multiple at the moment. With
unemployment at high levels, demand for the company's software and
services are at a multi-year low.
Well, it may be a no-growth business right now, but
free cash flow
remains quite impressive. H&R Block has generated a cumulative
$1.0 billion in free cash flow during the past two years. While
business slumps andshares trade at levels last seen in 2002,
management has decided to use some of that
for ongoing stock buybacks. The company's share count has fallen by
10% in the past year, and management expects to take another chunk
of the share count out of the public's hands in 2011. And while
investors wait, they can also focus on the company's 4.6%
Will results rebound in 2011? Perhaps, but it will likely be a few
years before improving employment trends enable H&R Block to
post meaningful growth again. In the interim, the shrinking share
count should set the stage for eventually higher per share profits.
And it's unlikely that business will slump further, so that
miniscule P/E ratio likely provides solid downside to the stock. If
you're looking for long-termappreciation and a healthydividend ,
H&R Block is emerging as a solid discounted play.
Diamond Offshore (NYSE:
One notable event stood out as the black-eye of 2010: the Gulf oil
spill, which along with
, took downshares of Diamond Offshore, an operator of 46 offshore
rigs for clients on several continents. Diamond is the country's
second-largest provider of offshore drilling services, by
. The company'sshares plunged from $100 at the beginning of the
year to around $60 by June, and they've been stuck there ever
The Gulf oil spill surely hurt. Sales are on track to fall -8% in
2010, while profits are off by a third. And few expect a sharp
snapback in 2011, as drilling in the Gulf remains below previous
levels while the industry settles on new safety standards. This
business is all about supply and demand. With weak rental demand
for these ultra-expensive rigs, asking prices are off sharply. The
industry must now wait for demand to catch up with the supply of
rigs, at which time daily lease rates should rebound.
More than likely, gulf drilling activity will only slowly rebound
during the course of 2011, setting the stage for much improved
results in 2012. As investors look ahead and anticipate that
rebound, and a jump back in
earnings per share (
toward the $10 mark in 2012,shares should make up some of the lost
ground from 2010.
Action to Take -->
All the companies on this list sold off for good reason. But
SUPERVALU, Office Depot, Diamond Offshore and Office depot sill
look poised for better days ahead. Near-term results could still be
uninspiring, but incremental improvements should bring some of
these deep value names back onto investors' radars in 2011.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
P.S. -- Using the same principles that helped trounce the
S&P 500 for seven years, one of our top investing gurus, Nathan
Slaughter, hand-picked all 10 of the stocks featured in his latest
exclusive report, The Top 10 Stocks for 2011. These 10 stocks are
not only poised to deliver above-average returns throughout the
2011 calendar year, but also in the years that follow...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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