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Banged-up stocks may be headed for rebound |

Banged-up stocks may be headed for rebound

John Dorfman
| Sunday, January 22, 2012 12:00 a.m

Some people like to care for injured birds. I like banged-up stocks.

That’s why each quarter I compile a Casualty List of stocks that have taken big hits the quarter before. These are stocks that in my view have been punished too much, and have rebound potential.

The list you are about to read is the 35th one I have compiled, beginning in 2000. (I missed a few quarters, mostly because of my temporary retirement as a columnist.)

Twelve-month returns can be calculated for 31 of the previous lists. Twenty-two of them beat the Standard & Poor’s 500 Index, and 24 were profitable.

On average, the previous lists have shown a 12-month return, including dividends of 26 percent, compared with 6.3 percent for the S&P 500. That illustrates my thesis that it pays to buy banged-up stocks if you believe the problems depressing them are temporary.

The results for my column recommendations are theoretical, and don’t reflect taxes or transaction costs such as commissions.

In the fourth quarter of 2011, about 85 percent of all stocks rose. But among the decliners are a few stocks that interest me.

The largest is Oracle Corp. (ORCL) of Redwood City, Calif. A software leader, Oracle specializes in databases and servers. Its shares fell 10 percent in the fourth quarter.

Oracle fell mainly because its earnings for the fiscal second quarter (ended Nov. 30) disappointed investors. The company earned 43 cents for the quarter; analysts had expected 45 cents.

Never mind that the 43-cent figure was the best Oracle had ever posted in the November quarter. I think investors put too much emphasis on the rite of companies beating analysts’ expectations.

Right now, Oracle shares fetch 14 times the company’s per-share earnings. The average for the past decade has been 20 times earnings, so the stock is cheap relative to its own history.

Newmont Mining Corp. (NEM) fell about 5 percent in the quarter. The Greenwood Village, Colo., company is the largest gold producer based in the United States, and one of the five largest in the world.

There is no mystery about why Newmont shares fell. Spot prices for gold dropped from a peak of $1,900 per ounce in early September to a low of $1,546 at year-end.

I still believe the long-term trend for gold is up. As investors watch Congress and various European legislatures struggle with debt issues, they will want something they perceive as safer than paper currency.

At its recent share price of $63, Newmont sold for 14 times earnings. That’s compared with a 10-year average P/E ratio of 44.

My third Casualty List pick is Chesapeake Energy Corp. (CHK) of Oklahoma City, a major natural-gas producer. Chesapeake shares fell 13 percent in the fourth quarter, on top of similar declines in the two previous quarters.

No one wants to go near natural-gas stocks at the moment, mainly because the spot price of natural gas for future delivery has fallen to $2.57 per million British thermal units recently from more than $11 at the 2008 peak.

A shortage of natural gas in the United States has turned into a glut, as many promising deposits have been found in shale formations, including the Marcellus.

Am I crazy to recommend a natural-gas stock in these circumstances• Perhaps. But the lower natural-gas price is already causing some consumers and businesses to switch to gas from oil or coal, and I expect that trend to continue.

Chesapeake just posted a record quarter for revenue ($3.3 billion) and profit ($922 million). Perhaps someone forgot to tell the company that it is in a terrible business.

John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Mass., and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached via email.

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