Banged-up stocks often make the best buys. I like to buy stocks on bad news that is real but temporary. That’s why, each quarter, I publish a Casualty List of wounded stocks I think will recover.
Apple Inc. and Exelon Corp. are both on the list. I also recommend GTAT Advanced Technologies Inc. and Finish Line Inc. Each was down 15 percent or more in the fourth quarter.
The average 12-month return for my Casualty List stocks has been 23.8 percent versus 7.3 percent for the S&P.
Bear in mind that column results are hypothetical, and don’t reflect trading costs or taxes. Also, past performance may not predict future results.
Three of four Casualty List stocks I recommended in January 2012 have declined, with the worst disaster being RadioShack Corp., down 76 percent. Undaunted, I offer four new selections:
Apple Inc.: In the past couple of years, I haven’t been a fan of this stock because it seemed everything that could possibly go right for the company had already done so. Now, however, investors are worrying about whether Tim Cook can fill the late Steve Jobs’s shoes, and fretting whether all the new tablet computers coming onto the market will eat into Apple’s dominant market share. Apple fell 20 percent in the fourth quarter.
That leaves it at 12 times earnings, a mighty attractive multiple for a stock whose earnings have grown 43 percent a year in the past five years.
Apple is debt-free. It had more than $10 billion in cash or near-cash and $18 billion in marketable securities on Sept. 30. Its iPhone, iPod, iPad, and Macintosh are products that people want. I don’t suppose things can keep going as swimmingly for Apple as they have. But if the growth rate is cut in half, the stock still looks like a reasonable purchase.
Exelon Corp.: It’s a Chicago-based utility I’ve owned in the past and may own again. From 10 power plants in Illinois, Pennsylvania, and New Jersey, it generates about 20 percent of all US nuclear energy.
I’m a proponent of nuclear energy. Despite its obvious risks, it can mobilize a great deal of power without the air pollution hazards of oil and coal.
Shares were sliced 16 percent last quarter because the company said it may need to cut its dividend, to preserve its investment-grade credit rating. The dividend yield right now is a fat 7.2 percent.
GT Advanced Technologies: Based in Merrimack, N.H., it makes furnaces used to manufacture purified silicon for solar panels and furnaces used to make artificial sapphires for LED (light emitting diode) lighting. Its shares dropped a hideous 44 percent in the fourth quarter.
Its business is in the tank because there is a worldwide glut of solar panels, so hardly anyone needs to buy the equipment to make more. However, the artificial-sapphire business is in better shape. And the company should be able with withstand tough times, given $479 million of cash on the balance sheet.
Investors have oversold GTAT. It trades below book value (corporate net worth per share) and at about three times earnings, dirt cheap.
Finish Line Inc.: I’ll finish with Finish Line, of Indianapolis, which fell 17 percent in the quarter after reporting a loss. This retailer sells athletic shoes and “active wear.” Its new website flopped, and it apparently had too many running shoes in stock and not enough basketball shoes.
Those seem like fixable problems — and this company is no slouch. Its five-year earnings growth rate exceeds 20 percent and it has been profitable in nine of the past 10 years (all except fiscal 2008).
John Dorfman is chairman of Thunderstorm Capital in Boston. His firm or clients may own or trade securities discussed in this column.