4 Stocks Taking an Unnecessary Beating

by Will Ashworth | September 18, 2013 9:30 am

4 Stocks Taking an Unnecessary Beating

fightbeating185 4 Stocks Taking an Unnecessary BeatingYesterday, the S&P 500 closed above 1,700 for the first time in six weeks, bringing the benchmark index’s year-to-date gains to just under 20%.

Not too shabby.

In fact, when I screened for U.S. stocks that had a market capitalization north of $300 million and were down more than 5% year-to-date, only 11% of 2,655 stocks fit the bill.

Some of those 285 stocks sitting in the red are down a decent amount for good reason … but others have been unfairly punished. With that in mind, they could be solid choices for value-oriented investors.

Let’s take a look at a few oversold stocks in the teen retail, pet supplies, cloud and dieting spaces investors should consider buying now.

Aeropostale

AEROPOSTALELOGO 4 Stocks Taking an Unnecessary BeatingYear-to-date return: -22%

Before yesterday, teen retailer Aeropostale (ARO[1]) was sitting an ugly 34% in the red. In fact, the stock’s five-year annualized total return is almost 19% in the red — the mirror opposite of the broader group of apparel stores.

In the eyes of many experts, that’s made Aeropostale an attractive value play. Seeking Alpha contributor Tim Travis, for one, is a deep value investor who wrote in early September[2]:

“ARO is bleeding but not broken … The company’s sterling balance sheet and low valuation make it an attractive LBO target in a low interest rate environment.”

It turns out somebody was listening. Aeropostale’s stock jumped over 18% in trading yesterday on news that Sycamore Partners has taken an 8% stake in the company[3] and is exploring all of its options for jumpstarting the retailer.

While that still leaves ARO around 22% in the red year-to-date, and while it’s possible Sycamore could walk away from its investment in the future, it’s more likely the activist investor will move for significant change at Aeropostale. That alone should keep the stock price from backsliding into single digits.

Weight Watchers International

WEIGHTWATCHERS 4 Stocks Taking an Unnecessary BeatingYear-to-date return: -28%

Weight Watchers International (WTW[4]) has been punished so far in 2013 to the tune of 28% losses. A few reasons: Long-time CEO Dave Kirchoff quit in early August, while the company is dealing with increased competition from free online apps and activity monitors.

In the second quarter, Weight Watchers International’s revenue actually declined year-over-year by 4% on a constant currency business, and the stock lost 19% as a result[5].

It’s never recovered — but that sell-off was overdone.

See, the promising thing is that the board has hired Jim Chambers to take over as CEO. Chambers comes with executive stints at both Kraft Foods’ (KRFT[6]) U.S. snack business and Mondelez International’s (MDLZ[7]) Cadbury operations.

If you ask me, he’ll fix what needs fixing and have the profits rolling in in no time. Heck, only 18 months ago, the stock was trading above $80. And as it stands now, the company’s trailing P/E of 9 is the lowest multiple ever.

Rackspace Hosting

RACKSPACE185 4 Stocks Taking an Unnecessary BeatingYear-to-date return: -29%

Rackspace Hosting (RAX[8]) isn’t doing everything right, but it’s hardly doing everything wrong either. The comapny’s second-quarter results, for example, included 18% year-over-year revenue growth, 4% sequential growth and adjusted earnings growth of 10%.

Yet the stock is down 29% so far this year. What gives?

Well, Rackspace is continuing its push to become the world’s greatest hybrid cloud company, combining both public and private clouds. Its public cloud business is the second largest behind Amazon’s (AMZN[9]) Web Services. The reason it’s going hybrid is because its customers are asking for it. The bad news, though, is that this requires a substantial investment, which cuts into its adjusted free cash flow.

The good news: That’s only temporary. Since going public in 2008, Rackspace posted four consecutive years with positive total returns. That streak is on pace to be broken this year, but I don’t see why the investments it’s making now won’t pay off in 2014 and beyond.

Central Garden & Pet Co.

CENTRALPET185 4 Stocks Taking an Unnecessary BeatingYear-to-date return: -31%

Central Garden & Pet Co. (CENT[10]) — one of the largest pet and garden suppliers in the U.S. — is down 31% year-to-date. It currently trades around 50% below its five-year high just under $15 and has essentially missed the entire stock market recovery.

In the past, Central operated in a very decentralized manner and attempts to remedy that have been unsuccessful. In 2011, the company hired turnaround specialist Gus Halas as CEO. His goal was to extract $120 million in annual savings by September of next year, and more importantly transform the company into one cohesive, profitable unit with operating margins in the double digits.

He stepped aside in January, though, and the company then hired experienced consumer products executive John Ranelli to continue the transformation. Things haven’t gone well in Ranelli’s first eight months on the job: Third-quarter earnings slid 30% year-over-year thanks to falling sales and margins.

Still, keep in mind that Central once traded over $50. While I don’t think it’s going anywhere near that price, I do think the new CEO can get the stock into double digits by this time next year. If so, that would be an almost 50% return.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Endnotes:
  1. ARO: http://studio-5.financialcontent.com/investplace/quote?Symbol=ARO
  2. wrote in early September: http://seekingalpha.com/article/1670582-aeropostale-distressed-teen-retailer-is-a-perfect-fit-for-a-private-equity-led-buyout?source=yahoo
  3. taken an 8% stake in the company: http://investorplace.com/2013/09/activist-bets-on-aeropostale-after-one-ugly-august/
  4. WTW: http://studio-5.financialcontent.com/investplace/quote?Symbol=WTW
  5. stock lost 19% as a result: http://investorplace.com/2013/08/should-i-buy-shares-of-weight-watchers-3-pros-3-cons/
  6. KRFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=KRFT
  7. MDLZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=MDLZ
  8. RAX: http://studio-5.financialcontent.com/investplace/quote?Symbol=RAX
  9. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  10. CENT: http://studio-5.financialcontent.com/investplace/quote?Symbol=CENT

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