Methode, Dillard's and Micron Are on the Casualty List

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Jul 01, 2015
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The choppy second quarter roughed up a fair number of stocks. Among the wounded are four that I think have excellent potential to recover and makre strong gains.

Welcome to my 49th Casualty List, the latest in a series I began in 2000. One-year results can be calculated for 45 lists, and the average gain has been 21.2%.

I’m very proud of that figure, which compares with 9.4% for the Standard & Poor’s 500 Index over the various 12-month periods. Figures are total returns including dividends.

Of course, past performance doesn’t guarantee the future. Returns for my column picks are hypothetical and don’t reflect actual trades, trading costs, or taxes. And the returns for the column shouldn’t be confused with the performance I achieve for clients.

My selections from a year ago fizzled. United Community Banks (UCBI, Financial) was a bright spot, rising 29% from July 1, 2014 through June 26, 2015. Coach Inc. did okay, up 9%. But Geospace Technologies Corp. (GEOS, Financial), which I own for one client, plummeted 56%. And Ultra Clean Holdings Inc. (UCTT, Financial) was a dud, down 30%.

Overall, my picks from one year ago fell 12.07%, compared to a gain of 8.66% in the S&P 500.

Methode

I’m convinced that trying to buy good companies on bad news is a profitable technique. Here are four new stock selections, each of which was roughed up badly in the second quarter.

Methode Electronics Inc. (MEI, Financial), based in Chicago, Illinois, makes switches, connectors and other electronic devices used in cars, appliances, airplanes and other applications. The company has shown a profit in nine of the past ten years.

In the past two years Methode has been highly profitable, earning more than 20% on stockholders’ equity. The stock was slammed for a 34% loss in the past 13 weeks because the company reported disappointing earnings for its latest quarter, and lowered guidance for 2016.

In my opinion, investors punished the stock too harshly. At the recent price of about $30, Methode sells for about 10 times recent earnings and about 11 times the lowered estimate for fiscal 2016.

Dillard’s

Traders clipped 20% off the market value of Dillard’s Inc. (DDS, Financial) in the past 13 weeks. The Little Rock, Arkansas-based department store chain must constantly fight against the trends for shoppers to use the internet and specialty stores instead of department stores.

It has been pretty successful in this, but same-store sales have declined in a couple of recent quarters. Dillard’s is a mature company, but I think its management is capable. At its recent price of $108, which is 14 times earnings and less than 0.7 times revenue, I think this stock is a reasonable buy.

Cloud Peak

Cloud Peak Energy Inc. (CLD, Financial) shares declined 18% in the past 13 weeks, which is nothing new. The stock has been on a downward trajectory since 2011 when it traded above $20 a share most of the year. Today it sells for less than $5.

Based in Gillette, Wyoming, Cloud Peak mines coal at two mines in Wyoming and one in Montana. I have rarely seen an industry as out-of-favor as coal mining is now. And there are many reasons, all valid to some extent.

Coal is a highly polluting fuel (although Western coal, which Cloud Peak mines, is less so than Eastern coal). Coal companies and utilities that burn coal are subject to increasingly stringent regulations. And cheap oil and gas give coal stiff competition.

I’ve been wrong about this stock before, but it seems to me to be so utterly cheap as to be attractive. The shares fetch only three times earnings and 0.26 times book value.

Micron

Down about 26% in the past 13 weeks is Micron Technology Inc. (MU, Financial), which I own for most of my clients. Micron is one of the world’s three largest makers of memory chips, the other two being Samsung and SK Hynix, both of South Korea.

Micron stock has suffered partly because about two thirds of its chips go into personal computers, which have become less popular as mobile devices have become more so. The transition to a mobile environment has been difficult and costly for Micron, but I believe it is making it.

In addition, Micron is strongest in producing chips (dynamic random access memory) chips. These are not as fast as SRAM (static random access memory) chips, which are gradually gaining market share. I believe that Micron’s current stock price – less than $20 a share, or about six times recent earnings – takes these troubles into account, and then some.