Every week, Canada’s national newspaper, the Globe and Mail, publishes a list of stars and dogs in the stock markets. The general thinking being the stars are the stocks to buy while the dogs, such as GameStop (NYSE:GME) — the video game retailer that has lost a significant portion of its market cap over the past five years as gamers have gone online — are to be avoided.
In the five-day period ended Aug. 31, GME stock lost 19.9% of its value despite the company announcing in June that it was looking for a buyer.
It can be nerve-wracking to see a stock drop by 20% in the span of a week. However, there are times when it’s better to hold on despite the urge to cut and run. Some companies aren’t worth the paper their annual reports are printed, but others are stable businesses where investors have overreacted to a piece of bad news. They can get knocked for a big loss, only to rebound a few weeks later.
The difficulty is in recognizing the difference.
Using Finviz.com’s stock screener, I’ve found 32 stocks with a market cap over $2 billion that have lost at least 10% through the five days ending Sept. 5.
Some of them are real dogs, but others are experiencing temporary volatility and will recover.
Of the 32, I’ve selected seven stocks to buy that I feel are down, but not out.
Stocks to Buy: Electronic Arts (EA)
Five-Day Loss: 12.7%
Electronic Arts (NASDAQ:EA) learned the hard way recently that you don’t want to keep gamers waiting.
The company announced Aug. 30 that it was delaying the release of Battlefield V by one month to Nov. 20, sending its stock into a downward spiral.
But that’s not the only thing that’s put investors in a seriously bad mood. It also delivered weak earnings guidance in July while releasing its Q1 2019 quarterly results. Before the release it expected 2019 full-year net bookings of $5.55 billion; it now expects net bookings of $5.2 billion, or 6.3% less.
Add to that the terrible shooting in Jacksonville and the departure of the company’s head of game development and you’ve got the makings of a significant correction.
But here’s the thing.
EA stock hasn’t had a down year since 2012. It’s expected to generate $1.8 billion in cash flow in 2019, a company record.
With a rock-solid balance sheet, I’d take the recent weakness as a buying opportunity, but keep a little in reserve in case it drops some more.
Stocks to Buy: Dollar Tree (DLTR)
Five-Day Loss: 11.5%
Dollar Tree (NASDAQ:DLTR) is getting crushed by its rivals over the past 52 weeks: Dollar General (NYSE:DG) is up 50% and Dollarama (OTCMKTS:DLMAF), Dollar Tree’s Canadian competitor, is up 12% over the same period. Meanwhile, DLTR stock is flat.
Ouch, to anyone who bought its stock last summer and is still holding.
What’s the problem?
Dollar Tree paid $8.5 billion in July 2015 to buy Family Dollar and it has yet to perform at the level of the Dollar Tree stores.
The discount retailer reported Q2 2018 earnings Aug. 30. Dollar Tree same-store sales rose 3.7%, the same as Dollar General’s most recent quarter, while Family Dollar same-store sales were flat in the second quarter, down from 1% growth a year earlier.
It’s taking a long time for Dollar Tree to get Family Dollar up to speed and while it’s too early to pull the plug on the acquisition, investors are getting impatient, which is putting extreme downward pressure on DLTR stock.
It has dropped by so much in 2018 that you can buy it for less than 12 times cash flow; Dollar Tree hasn’t had a price-cash-flow multiple this low in over a decade.
Will it fix Family Dollar? I can’t say.
What I do know is that Dollar Tree operates in one of the best segments of retail — in good times and bad — and that means, for me, the upside outweighs the downside at this point.
Stocks to Buy: WPP (WPP)
Five-Day Loss: 11.5%
The ad business in North America isn’t what it used to be, and it’s not just because Mad Men no longer produces new episodes.
“Large multinational marketers (i.e. CPG) continue to shift dollars in-house and aggressively manage agency costs and fees,” Forrester principal analyst Jay Pattisall told Adweek recently. “Omnicom, Publicis, MDC and WPP all reported declines or lackluster results citing their North American operations as areas of decline.”
WPP PLC (NYSE:WPP) reported Q2 2018 results Sept. 4. Like-for-like revenue was up in every geographic region except North America where it saw them fall 0.3% in the second quarter and 0.7% in the first six months of the year.
Not to worry.
WPP’s new CEO, Mark Reid, is undertaking a strategic review of its business to optimize its size and stature.
“We’re not trying to manage 400 different independent companies, so I’m not sure why we have to have 400 different independent brands,” Read said discussing WPPs future structure. “We need enough brands to manage client conflict but not so many that it makes the business impenetrable to understand.”
Read wants to move from lower-margin execution services to higher-margin consultative ones.
At the end of the day, WPP is no different than a company like Procter & Gamble (NYSE:PG), in that it has too many brands that aren’t getting the investment and focus they deserve; as a result, it makes total sense to fold those brands into bigger ones such as J. Walter Thomson or Ogilvy.
Long-term, I like where Read is taking WPPs business.
Stocks to Buy: Mercadolibre (MELI)
Five-Day Loss: 13.3%
I’m a big fan of South American businesses such as Mercadolibre (NASDAQ:MELI). They have to deal with issues North American companies rarely encounter, and that makes them far more resilient to challenging operating environments.
If you don’t know Mercadolibre, it’s considered the Alibaba (NYSE:BABA) of South America. I first recommended its stock in 2013, suggesting that its location made it a wonderful growth company but without the inventory concerns of Amazon (NASDAQ:AMZN).
I’ve since become a fan of Amazon.
However, the recent problems Mercadolibre faces in Argentina, where interest rates have spiked to 60%, are temporary. Every South American company operating in Argentina is experiencing this same situation.
In its most recent quarter, it grew revenue and gross merchandise volume by 44% and 36% respectively excluding currency — well above analyst estimates.
“The outlook for our industry is as positive as ever, and our investment thesis remains intact,” said CEO Pedro Arnt. “The internet is rapidly becoming a driving force that is increasing the pace of modernization in Latin America.”
As South American companies go, Mercadolibre is one of my favorites.
Stocks to Buy: PVH (PVH)
Five-Day Loss: 12.2%
Beauty is in the eye of the beholder.
So, why the significant loss after it upped guidance for the year, to $9.20 a share from its previous estimate of $9.05?
In a word: margins. Overall gross margins declined by ten basis points to 58.3% with operating margin erosion at both Calvin Klein — 60 basis points to 12.2% — and Calvin Klein International — 210 basis points to 9.8%.
Not to worry. The owner of Calvin Klein and Tommy Hilfiger continues to transform its business to meet a more demanding consumer.
“We are increasingly evolving our business model and investing across our brands, our people and our platforms, while finding innovative ways to engage consumers,” stated CEO Emanuel Chirico. “As we execute on our strategic priorities, we believe that we can continue to grow our global footprint, while delivering a sustainable trajectory of long-term growth and stockholder value creation.”
As long as retail continues to kill it, I would take every big correction in PVH stock, to buy some more.
Stocks to Buy: Icahn Enterprises (IEP)
Five-Day Loss: 12.9%
Most investors won’t be interested in Icahn Enterprises (NYSE:IEP) because it takes a Ph.D. to understand the financial statements. For those willing to do a little mathematical gymnastics, the IEP decline of almost 13% in a single week of trading suggests it is severely oversold.
If you look at the stock’s relative strength index (RSI) reading — it’s currently 21, below 30, which is considered oversold territory, and well below the large universe of dividend stocks followed by the Dividend Channel, which is 51– you’ll see that IEP has lost all of the gains it collected over the summer, although it’s still up 37% year to date through Sept. 5.
Icahn’s various investments cover some different segments including energy, automotive, actual stocks and bonds, real estate, and many others.
In the second quarter, Icahn Enterprises’ adjusted EBITDA was $356 million, 24% higher than a year earlier. Leading the charge was IEP’s investment segment which saw adjusted EBITDA rise by 41% to $157 million or 44% of its overall non-GAAP profit.
Some of the investment segment’s largest holdings include Newell Brands (NYSE:NWL) and Navistar (NYSE:NAV). However, Icahn’s largest investment is in Herbalife (NYSE:HLF); the partnership owns 21% of the MLM company worth $1.8 billion.
In the second quarter, IEPs investment funds gained 4.9%. Since inception in 2004, they’ve delivered a 6.7% annualized rate of return.
Still, only the most adventurous investors should take a look at Icahn Enterprises.
Stocks to Buy: Michaels Companies (MIK)
Five-Day Loss: 22%
Anytime a stock loses 22% in a week — on top of a 35% decline between the end of January and its latest drop — suggests only the heartiest of investors need to apply.
So, the two firms probably invested $2.3 billion of their equity. At the $17 IPO price, their holdings were worth $2.8 billion. On top of that they paid themselves $714 million in dividends — paid for with Michaels’ debt — so, they went out of the gate in 2014 with a $1.2 billion profit.
Over the next three years, Bain and Blackstone sold off a good chunk of their shares over $20, adding to their overall return on investment.
Today, Bain and Blackstone own 29% and 11% of the company respectively. Those shares are worth $1.2 billion.
In other words, they’ve made out just fine.
Meanwhile, Michaels is saddled with $2.7 billion in debt, not much less than when it was acquired in 2006.
Why do I say buy?
MIK stock is currently trading at 6.6 times its forward adjusted earnings estimate of $2.42 a share. Its same-store sales should be positive for fiscal 2018, and it’s in the middle of reorganizing the stores to be more attractive to customers.
Michaels is the value play of the seven stocks to buy.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.