Some of the best stocks to own are fundamentally sound companies that have been hit with a sudden crisis. Even the top names of the investment markets, like Apple Inc. (NASDAQ:AAPL) and Amazon.com, Inc. (NASDAQ:AMZN), have suffered severe losses. For example, AAPL has 13 negative annual returns in its history, while AMZN has seven. The difference between winners and losers is what an organization does about it.
The best stocks are tethered to companies that will push through any circumstance, good or bad. Again, using Amazon as an example, early critics blasted its lack of profits.
In the eleven years from 2004 through 2014, Amazon shares registered a positive return on only six of them. Technically, AMZN belongs in the category of comeback stocks. But nobody views it that way after a string of dominant performances and groundbreaking innovations.
Admittedly, it takes nerves of steel to roll the dice on comeback stocks. These investments were hit for a reason. At the same time, everybody wants a bargain. Natural human greed is what drives undervalued companies to jump back up to prior highs, or even higher. The tricky part is selecting companies with a legitimate chance of a recovery, and not speculate for its own sake.
Here are three beleaguered names that are now the best stocks to buy for 2017.
Comeback Stocks to Buy: Lumber Liquidators Holdings Inc (LL)
On February 10, 2016, a report by the Centers for Disease Control and Prevention acknowledged that Lumber Liquidators’ use of formaldehyde in their products exceeded standards, and that it could lead to respiratory irritation. However, at the time, the CDC stated that the risk of cancer due to formaldehyde exposure was low.
Move one day later and everything changed. The CDC reversed its earlier analysis due to inaccuracies caused by a math error — yes, a math error! Formaldehyde intensity studies were conducted using meters instead of feet. This had the effect of giving Lumber Liquidators a generous margin of safety. When the dust finally settled, LL stock found itself on the short end of the stick, dropping 20%. The rest of 2016 was a heavily choppy ride. Lumber Liquidators was lucky to only lose 8% in the markets.
But all that ugliness changed in the new year. LL has soared to 34.8% year-to-date, making it one of the best stocks to own. According to Oppenheimer technical analyst Ari Wald, a support base has formed for LL stock. To him, that indicates that all the bad news has been baked into Lumber Liquidators’ price tag. Further bolstering the bullish argument is a series of better-than-expected earnings performances.
Wall Street remains unsure about LL stock. As such, this contrarian bet could end up in the record book of comeback stocks.
Comeback Stocks to Buy: Vertex Pharmaceuticals Incorporated (VRTX)
One day, a pharma company could be on cloud nine, raking in the dough as a member of the “best stocks” community. The next day, it may face bankruptcy as a highly anticipated therapy fails to meet regulatory expectations.
The worst part is that a company can fall for no apparent reason. Just ask Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX).
VRTX stock had a horrific start for last year, losing over 35% in the markets in the first quarter. This erosion occurred despite the fact that the company offered plenty of optimism, including approval for some of their products. Likely, VRTX stock’s downfall was due to broadly negative sentiment for the entire sector. However, Vertex continued to be volatile for the rest of 2016, some resulting in anticipation of another Clinton White House.
But fortune has turned around for VRTX. Currently, shares are up over 60% YTD, easily one of the best stocks in the major exchanges. Positive sentiment towards the product pipeline is rising, as well as fundamental stability. Not too long ago, Vertex was ranked as an “F” on InvestorPlace. Today, it’s a “C,” thanks to bullish earnings performances and top-line sales growth.
Simply put, Vertex earned its status as one of the more remarkable comeback stocks.
Comeback Stocks to Buy: Chipotle Mexican Grill, Inc. (CMG)
What I don’t like, though, is investor sentiment. It’s usually very poor for companies that injure their customers, United Continental Holdings Inc (NYSE:UAL) notwithstanding.
I’ve made multiple comparisons to Jack in the Box Inc. (NASDAQ:JACK), which suffered a disaster from its food poisoning scandal. It took years and a brilliant marketing campaign to reinvigorate the organization. Now, JACK is one of the best stocks you can buy in the fast food segment. However, my concern for CMG was that it would have to kill margins to bring traffic back.
Obviously, management dug deep into their secret sauce. Sales are back up to pre-crisis territory. That gives them more room to scale back promotions. On a YTD basis, CMG stock is up nearly 26%. That doesn’t remove the bad taste from investors’ mouths, but it’s a fine start. I’m also digging how the Chipotle chart has “rounded out” since its food poisoning crisis. That tells me, as with Lumber Liquidator, that most of the bearishness is priced in.
CMG still has plenty of work to do, but it deserves its inclusion in the comeback stocks to buy list.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.