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Business

Buying good companies when the news is bad

Copper is one of the most economically sensitive of all commodities.

Rick Bowmer /Associated Press/Filke 2013

Copper is one of the most economically sensitive of all commodities.

The stocks I selected for my casualty list last July are up 70.9 percent in 12 months. They are:

 Western Digital Corp., a disk drive maker that I own personally and for clients, gained more than 112 percent.

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 TRW Automotive Holdings Corp., which fits into an auto theme that I continue to believe in, returned 81 percent.

 Met Life Inc., the big insurer, was up 54 percent.

 Body Central Corp., a clothing retailer, gained 36 percent.

In comparison, the Standard & Poor’s 500 returned 20.3 percent. All figures are total returns, including reinvested dividends.

Obviously, I can’t produce results that strong and consistent on a regular basis. But what the heck: Let’s have a drink and celebrate.

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The casualty list is a list I compile at the end of each quarter. It contains stocks that have been beaten up and that I think can bounce back and excel over the next 12 months.

Beginning in 2000, I have written 41 casualty list columns, including this one.

Twelve-month results can be calculated for 37 of those columns. The average total return has been 23.4 percent, compared to 7.8 percent for the S&P 500.

Of the 37 lists, 27 were profitable and 24 beat the S&P 500.

Please bear in mind that past performance does not predict future results. The performance of column selections is hypothetical and does not reflect transaction costs or taxes. And the results of column recommendations should never be confused with the results of actual portfolios I run for clients.

Now it’s time for some new casualty list selections, featuring stocks that were punished — perhaps excessively — in the second quarter.

Lindsay Corp., in Omaha, makes irrigation equipment. The company is expected to report record earnings of $5.56 a share in its current fiscal year, which ends in August. But analysts expect earnings to tail off a bit in fiscal 2014 because farmers seem likely to order a bit less equipment.

In that sense, Lindsay is untimely. But in terms of valuation, it is very timely. It now sells for 14 times earnings, about half of the average multiple for the past decade, which was 29.

Lindsay is a stock I have always liked, but most of the time it is too expensive for me. Last quarter’s decline of 15 percent brings it back into my buying range.

Several refining stocks were smacked down 15 percent or more during the second quarter, and I like most of them at current prices.

I will recommend Holly Frontier Corp. in Dallas. At $43, it sells for only five times recent earnings and seven times the analysts’ estimate of 2013 earnings.

Refiners will never have steady earnings like Kellogg Co. or Procter & Gamble Co., but Holly usually manages to be quite profitable.

Last year, it earned 32 percent on stockholders’ equity, which is excellent. In the past eight years, it has earned 20 percent on equity or better six times.

Several copper companies also took it on the chin. Copper is one of the most economically sensitive of all commodities. The copper group tanked on evidence of slower growth in China and jitters about the economy in the United States, where the Federal Reserve seems about to become less accommodative.

Well, copper producers are cyclical all right. But their swings are nothing compared to the swings in investors’ sentiment about them. Right now, I think investors have gone overboard on the pessimistic side. One copper company that I like is Freeport-McMoRan Copper & Gold Inc. It is trading at nine times earnings and offers a dividend yield of 4.5 percent. (One of my clients owns Freeport-McMoRan shares.)

My fourth and final selection this time is an off-the-beaten-path name, Myr Group. The Rolling Meadows, Ill., company specializes in the transmission and distribution of electricity.

Myr managed to go public in 2008, in the midst of the financial crisis. The stock showed some gains in 2008 and 2009, but it has been sleepy for 3½ years now.

Myr Group is debt-free, a quality I like. It sells for moderate valuations — 12 times earnings and 0.4 times revenue — despite a respectable return on stockholder equity of 14 percent last year. It fell 21 percent in the second quarter, on news of disappointing sales, but I suspect the reaction was overdone.

Buying good companies on bad news is one
of the best ways to make money in the stock market. That is exactly what the casualty list tries to do.

John Dorfman is chairman of Thunderstorm Capital LLC in Boston. He can be reached at jdorfman@thunderstormcapital.com.

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