by Marc Bastow | May 31, 2013 4:19 am
The market has done well in the year to date — and heck, even for the past 12 months.
The Dow Jones Industrial Average and S&P 500 are both up more than 15% year-to-date, with returns in excess of 21% across the latest 12-month period.
While a rising tide might not lift all boats, the three stocks listed below have seen their respective ships not only move up, but prosper despite being virtually dead in the water. Bad management decisions, poor products and fierce competition helped suck the life out of these stocks, and yet one year later all have made comebacks that leave the market returns in the dust.
What’s happened to change their fortunes? Let’s take a look at our three dead stocks still walking:
Why Left for Dead? As a poster child for an irrelevant PC-centric business model in the tech world, Hewlett-Packard (HPQ) was ticketed for irrelevance. Revenue growth stalled, profits were (and still are) squeezed, the company wrote off a series of poor investments (most notably Autonomy, but also Palm and EDS), and analysts pointed to slowing PC growth as the death knell for HPQ.
What’s Changed? Hitting rock bottom in November 2011, the company found resurgence and swagger: Newly installed CEO Meg Whitman raised the company dividend 10% in March 2012, Board Chairman Ray Lane resigned in April, and investors flocked to the stock based on its bargain-basement valuation.
Long-Term Prospects: Whitman & Co. have at least put the company on an even keel, and focused HPQ on growing the business by making it the new IBM (IBM), marketing the company as a services-oriented “enterprise solution” provider for the PC and server markets.
But it isn’t really working yet: although Q1 ’13 earnings results stunned the Street, revenue fell for a seventh consecutive quarter, with drops across all segments, including desktop (-18%) and notebook (-24%) sales, and more ominously, 10% in the enterprise space.
Where is HP going to generate that revenue growth Whitman’s looking for? At this point there doesn’t appear to be a good answer. The only good news is HPQ sits on $12 billion in cash, and with layoffs and closings helping margins, cash flow of just over $3 billion will continue to feed stock buybacks and dividends.
Verdict: I still don’t see why this stock keeps soaring, and, despite the head-scratching run, I’m not interested as a long-term buyer.
Why Left for Dead: For electronic retailer Best Buy (BBY), 2012 was a year in which the company had to weather a bid to take the company private from its own run-out-of-town founder Richard Schultze, who waved a $24 to $26 per share price around late last summer, only to see his efforts die just recently.
At the same time, competition from Amazon (AMZN), Target (TGT) and Walmart (WMT) cost BBY revenue … and with stores closing, employees losing jobs, and the company using up its meager supply of cash to repurchase stock, all was looking pretty lost by year end.
What’s Changed? Hiring Herbert Joly in September — a move that nobody saw coming — just might’ve worked. Joly stabilized a confused and rudderless management, and while he had to make the tough decisions on layoffs and store closings, at least someone was in charge.
Joly also took a step in the right direction by naming Williams-Sonoma’s (WSM) Sharon McCollum as its CFO. McCollum spent 10 years with the retailer, including 6 as COO, and her expertise in e-commerce put BBY on a better track for its online business.
Long Term Prospects: Schulze gave up trying to buy the company, accepting a role as “Chairman Emeritus”. The stock reacted with an immediate 5% bump on the February news. So at least that roadblock is out of the way.
Joly and his management team are focused on growing the online footprint. How? One example is BBY’s introduction of a low-price guarantee that allows customers both online and in the store to price-check items against 19 competitors to find the lowest price … and match it.
But wait, there’s more: BBY closed 49 Best Buy Big Box stores, while opening up 126 new Best Buy Mobile locations. You get the drift: big box bricks and mortar are slowly on the way out. The strategy is slowing paying dividends: While Q1 FY 14 revenues were lower against Q1 FY 13 by almost 10%, the company saw a decrease in same store-sales declines, down to 1.5% from 5.25%, and comparable online sales increased 16% — a bump up from 10% during the comparable period.
Verdict: This one might take some time, but with a dividend to sit on and Joly firmly in charge, I believe BBY is a longer-term keeper.
Why Left for Dead? Specialty coffee and coffee maker Green Mountain (GMCR) was actually flagged for death back in 2011 by InvestorPlace’s Will Ashworth, in the middle of a stupendous crash. The stock had risen from a split-adjusted $8 per share to more than $100 per share in September of 2011 before crashing back down to $45 by the end of the year.
The impetus for the sell-off? Its Keurig single-serving coffee pods patent was expiring in 2012, and competition for that pod platform was increasing as a new entrant — privately held Rogers Family — starting selling its pods through Costco (COST) and Safeway (SWY). Oh, and hedge fund manager David Einhorn was already looking to short the stock.
What’s Changed? Everything but the original concept of the single-serving pod. Most importantly, GMCR has found a way to peacefully co-exist with the industry’s 800-lb gorilla: Starbucks (SBUX). The companies first entered into a partnership agreement in 2011 to make and sell Starbucks and Tazo-brand pods for use in the Keurig system. The partnership’s value was more than 850-milllion Starbucks coffee K-Cup packs sold for use in the Keurig system.
The agreement has been extended, and now Starbucks is the exclusive premium brand coffee for the Keurig K-Cup and GMCR’s Vue platforms, and GMCR now carries a wide and popular lineup of coffee and tea products for its still popular delivery system.
Long Term Prospects: GMCR’s moves are paying off: Single serve K-Cup revenues improved 21% on a year-over-year basis in Q1, and GMCR projects 11% to 14% revenue growth for the full year, with an EPS growth rate of 27% to 31%.
Verdict: Not only do I like the coffee and the coffee delivery system, I like the stock for the long term, too.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he does not hold a position in any of the aforementioned securities.
Source URL: http://investorplace.com/2013/05/3-dead-stocks-still-walking-gmcr-bby-hpq-amzn-tgt-wmt/
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