Let’s look at the dregs.
Some of this year’s worst performing stocks will vanish into history, but others will claw their way back. Let’s try to figure out which are which.
Among the 520 U.S. stocks with a market value of $10 billion or more, only five are down more than 15% year-to-date through December 13. Four are energy companies, and I like two of them. Here is the dishonor roll.
Occidental Petroleum (OXY) is down 33% this year. The Los Angeles corporation struck a costly deal for an ambitious acquisition – Anadarko Petroleum. It forked up about $40 billion, including assumption of Anadarko’s debt.
Occidental went to Warren Buffett, CEO of Berkshire Hathaway, for $10 billion in financing. Buffett, famous for his deal-making skill, got preferred stock paying an 8% dividend, and warrants to buy up to 80 million shares.
I think Occidental shares will advance, but it isn’t one of my favorite energy stocks for the next couple of years.
Sundance Energy Australia Ltd. (SNDE) doesn’t quite ring my bells either. It has been an Australian company that explores for oil and gas in the U.S. Last month, its shareholders approved a plan to relocate its headquarters to the U.S., in Denver.
The stock is down 31% this year and has declined every year since 2016, when it started trading in the U.S. There are some hopeful signs, notably a turn to profitability this year after four years of losses. But I suspect there are better buys in the oil patch.
Concho Resources (CXO), based in Midland, Texas, drills for oil and gas mainly in Texas and New Mexico. The shares are down 23% this year.
The stock is selling below book value (corporate net worth per share). Over the past ten years, it has been able to increase book value at an 18% annual pace.
Of course, the first five years in that period were much better than the past five, when the energy industry was cursed. A few dozen energy companies bit the dust during the bad times, and I fear more will follow. But I think Concho will survive and eventually thrive.
Kraft Heinz Co. (KHC), a food conglomerate based in Pittsburgh, Pennsylvania, is down 23% this year, which shows that even Warren Buffett isn’t perfect. (His Berkshire Hathaway owns more than 26% of the company.)
Prevailing wisdom is that Kraft Heinz is awkwardly positioned at the time when consumers, especially younger consumers, are demanding fresh, less-processed, food.
One might be tempted to buy this stock because it’s selling for less than book value. But much of the book value consists of goodwill, an intangible. Tangible book value is negative.
Harold Hamm, the son of two Oklahoma sharecroppers, is one of the richest 100 men in the U.S. He was a pioneer in fracking to extract oil and gas from shale deposits. He founded Continental Resources (CLR) in 1967 at the age of 21.
This year, Continental Resources’ stock is down 17%. In 2014, just before the oil-patch downturn, the stock was near $75. Today it trades for a little over $33.
The company took losses in 2015 and 2016, but moved into the black in 2017. Its profits are respectable though not spectacular–much better than many oil-and-gas firms these days.
Each December since 2011 I’ve written about the year’s biggest losers year-to-date. Today’s column is the ninth in that series.
The previous eight columns covered 40 stocks, of which I recommended 18. Those picks have risen an average of 31.1% in 12 months, which compares well with 16.6% for the Standard & Poor’s 500 Index over the same periods.
My picks were profitable in only four of the eight years, and beat the S&P 500 only three times. But those three victories were by lopsided margins, with hypothetical returns of 105.9% in 2012, 101.5% in 2015, and 144.1% in 2016.
Bear in mind that my column results are theoretical and don’t reflect actual trades, trading costs or taxes. The column’s record shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
A year ago, I recommended three stocks, Perrigo Co. (PRGO), Mohawk Industries (MHK) and L Brands (LB). Perrigo did very well, Mohawk Industries did well, and L Brands declined further. The aggregate performance was 16.8%, versus a walloping 34.8% for the S&P 500.
Disclosure: A private partnership I manage owns call options on Continental Resources. A few of my clients own shares of Berkshire Hathaway.
John Dorfman is chairman of Dorfman Value Investments LLC. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].