There are scores of beaten-down stocks in the S&P 500, and surely some of those could be next year’s Best Buy (BBY). After all, about this time last year, everyone was writing the retailer’s obituary.
Cut to today, and BBY is the top performing stock in the S&P 500 for 2013, gaining nearly 270%.
But Best Buy’s turnaround notwithstanding, as Buffett says, most turnarounds don’t turn.
The cruel reality is that most beaten-down stocks aren’t going to be like Best Buy. Sagging sales, negative returns on equity (that shareholder-value-destroying sign of a low-quality stock), flawed execution or simply getting creamed by the competition are some of the reasons a stock can’t make it back.
So, by all means, scour the market for laggards that could turn into next year’s 10-baggers. More often than not, however, stocks are down for a good reason. Here are three beaten-down names that look to stay that way:
St. Joe (JOE), one of the biggest private landowners in Florida, hasn’t had a lot of good news lately. Sure, quarterly earnings beat some very low expectations, but that’s small solace for a steep decline in revenue, led by ugly sales of commercial real estate and rural land.
Ongoing sluggishness in rural land sales is the biggest drag on profitability, and there’s little reason to think that will change soon.
Indeed, in another blow, hedge-fund manager David Einhorn — who has a short position in St. Joe — just claimed a victory for his contention that the market greatly overstates the value of the company’s land.
With nearly nonexistent ROE, declining cash on hand and increasing debt, St. Joe won’t turn around soon.
VeriFone (PAY) was once almost untouchable in its industry, but now it seems everyone is gunning for digital — and especially mobile — payments.
Fourth-quarter earnings are on tap for mid-December, and they sure aren’t looking pretty. Earnings per share are forecast to drop to 26 cents from 76 cents a year ago. Meanwhile, revenue is projected to slide nearly 14%.
Furthermore, VeriFone stock still looks expensive relative to growth prospects. PAY goes for 16 times forward earnings even though it’s forecast to grow those earnings at an average pace of only 5% a year.
If there’s an early favorite to be next year’s Best Buy, it’s probably JCPenney (JCP). Former CEO Ron Johnson couldn’t have screwed up this retailer more if he tried, and the market loves that JCP brought back Myron Ullman as CEO.
Ullman is doing an admirable job cleaning up his predecessor’s mess. Indeed, JCP stock is up 10% during the past month on signs of a burgeoning turnaround. But what a mess it is.
The decline in revenue has been less severe for two straight quarters, but it’s still dropping — and is essentially flat compared with its nadir of 2012.
JCPenney has won some customers back, but not nearly enough to avoid an ugly holiday selling season — one in which the only way to move merchandise will be margin-crushing discounts.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.