If you had the wisdom to lock in profits in your portfolio in
October 2007, then you are one of the lucky few. Themarket started
to weaken soon after that and went on into a very deep funk during
the following 18 months. For those who rode out the storm, the Dow
Jones Industrial Average and the S&P 500 have only recently
clawed back to break-even. In effect, investors have spun their
wheels for five years.
But it could have been worse. Some stocks still haven't climbed
all the way back and still trade far below that October 2007 high
watermark. This doesn'tmean they are bad companies, they've simply
stayed largely out of favor -- at least relative to the rest of the
market. In fact, there are some very good companies among the group
of five-yearlaggards . They have been able to boast higher sales
and profits since then, and look well-positioned for the eventual
and inevitable economic rebound.
Three stocks in particular, which have fallen by 40% or more
during the past five years -- compared to the market's break-even
performance -- could post outsized returns in the next few years as
their stars start to re-align. At a minimum, their multi-year
stretch of underperformance has given them a solid value sheen,
which could help provide downside support if the major market
averages weaken from here.
1. Baker Hughes (NYSE:
A half decade ago, firm oil and gas prices provided amplecash flow
to invest in energy fields, which was leading to record sales for
the industry's top service providers. Since then, we've seen a
precipitous plunge in gas prices, which led investors to flee these
, the industry's top player, are down roughly 20% since late 2007,
but Baker Hughes, a smaller rival, is off by a whopping 50%.
Yet appearances are deceiving. Baker Hughes has still managed to
deliver solid growth, with sales doubling from $10.4 billion in
2007 to nearly $20 billion last year. Still, the company has had to
fight hard to win contracts, sacrificing margins in the process,
sooperating income only grew around 10% from five years earlier, to
a recent $2.56 billion.
Analysts increasingly expect a turn in 2013. The recent spike in
natural gas prices has led to a rising number request for quotes
(RFQ) for the company, whilebacklog is expected to start rising
this winter. Though 2012earnings are likely to fall around 25% to
$3.30 per share, analysts see earnings rising back to $4 a share in
2013 and $5 in 2014.
2. Corning (NYSE:
Five years ago, consumers were scrambling to buy the latest big
screen TVs. Yet the GreatRecession led to a big slump, greatly
affecting the sales andprofit margins of top LCD and plasma glass
producers such as Corning. Shares now trade for less than half the
levels seen five years ago.
The good news: Some rivals have had to close plants, so industry
capacity is now lower, which should spell the end of price wars.
Indeed Corning recently announced two big contract wins with TV
makers. This should help the company to firm up profit margins in
this division as more factoryoverhead is absorbed.
Yet for some investors, the main reason tospot a rebound for
Corning is its "Gorilla Glass," which is becoming increasingly
popular among smart phone and tablet computer makers that
appreciate this material's thin form feature. On a recentcall with
analysts, Corning noted that 33 electronics companies are using the
technology, adding up to roughly 900 design wins and more than 1
Corning's per-share earnings are likely to dip nearly 30% this
year to around $1.30, thanks to pricing declines in LCD glass that
have now been absorbed. Yet with pricing in that segment now
stabilized, and with the Gorilla Glass segment showing solid
momentum, earnings per share should move up toward the $1.50 mark
in 2013 and 2014, according to Goldman Sachs analysts, who
anticipate shares will likely rebound to $16.
3. Johnson Controls (NYSE:
This diversified industrial firm has seen its stock fall by 40%
during the past five years, thanks in part to tepid growth: Sales
have grown from $34.6 billion in fiscal (September) 2007 to a
likely $42.4 billion in fiscal 2012. This works out to about 5%
annually. Analysts expect a similar growth rate for the 2013fiscal
year that began in early October.
Yet this is known as a "late-cycle" industrial play, as its
various divisions tend to see a pickup in orders when theeconomy
appears to be on firmer footing. For example, JCI is a leading
provider of heating, cooling and ventilation equipment, and
typically sees rising orders when the housing market is
Even as a firming economy might set the stage for double-digit
sales growth as we head toward the mid-decade, management isn't
sitting by idly. Instead, it has laid out restructuring plans that
should help boost thebottom line much sooner. As a result,
operating profits are expected to rise by $500 million in fiscal
2013 (to about $2.7 billion), enabling earnings to rise about 15%
to $2.90 per share, which would represent a company record.
Risks to Consider:
These stocks are out of favor because they are experiencing the
bottom of the cycles in their markets, and those cycles may not
turn up quickly.
Action to Take -->
It's impossible to know the perfect time to buy cyclical stocks.
Investors will flock to them the moment that the economy or their
specific industry cycle is about to turn up. Yet after falling 40%
or more from their last cyclical peak, it's clear these three
stocks are unloved and undervalued in the context of the eventual
turn in the cycle.
-- 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.