Will These 3 Laggard Stocks Outperform In 2014?

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By Tim Melvin

What Is Deep Value? (Your Introduction to a Lucrative Strategy). Free Live Webminar. Register here to attend the event and also receive a recorded copy.  

The best performing stocks in the S&P 500 in the past year have been Netflix, Micron Technology, Best Buy, Delta Airlines and Constellation Brands.

The interesting thing about these stocks is that as investors came into the year, they were not on anyone’s list of top performers or even likely winners. Most of them were on the worst performing list for 2012 and with the exception of Netflix, there was very little market buzz or chatter about any of these stocks.

The rest of the top ten performers include names like Pitney Bowes and Boston Scientific, whose very existence was being questioned by many as 2013 began.

It would just seem to make sense to take a look at those stocks in the index that have lagged the recent rallies and may be poised for a strong recovery over the next 12 months. When looking at the index stocks, it becomes clear that if you dig stuff out of the ground, your stock has not done very well in the past year. Miners of all types of metal and coal have done very poorly as have many energy companies that drill for oil and gas.

The worst performing stock over the past 52 weeks has been Newmont Mining (NYSE: NEM).

The company is one of the world’s largest producers of gold and also has copper mining operations around the world. The company has operations in the United States, Australia, Peru, Indonesia, Ghana, Bolivia, New Zealand and Mexico as well as development projects in West Africa. The stock has fallen by 46 percent in the past year as gold has lost some of its luster with investors.

The stock is now trading right at tangible book value, something that has not happened in the last decade or so. At this level, the shares have become fairly cheap and any positive developments in gold markets could send the share shooting higher over the next year.

Cliffs Natural Resources (NYSE: CLF) is the second worst performer of the year with the stock down 38 percent.

The stock is certainly cheap, trading at just 60 percent of its tangible book value. The concern here is that the global iron ore market is suffering from oversupply and it is simply going to take some time for the weak global recovery to work off the excess. If the market for iron ore and metallurgical coal should firm quicker than analysts expect, then this stock could be a top performer in 2104.

Long term investors should note that the recovery prospects for this stock over the next five years are extraordinary. Excess supply in the market is going to eventually lead to a decline in capacity, as smaller and marginal mining facilities are unable to stay in business.

Peabody Energy (NYSE: BTU) is the world’s largest publicly traded coal company and has been hurt by the secular decline in US coal usage.

What investors may be overlooking is that coal demand globally is increasing and the company is well positioned to serve the export markets. The Australian operations in particular are in a good position to serve what will be fast growing demand from Asian and emerging market economies that do not have the hostile political and regulatory issues that coal face in the United States.

The company trades at 1.1x book value and with the exception of a decline below book value for a brief period last year, this is the lowest multiple of asset value the shares have reached in the last decade. Earnings could rebound sharply next year and turn this losing laggard stock into a market leader. As with Cliffs, the long term recovery possibilities in Peabody Energy shares are exceptional.

It was the poet Horace who observed, “Many shall be restored that now are fallen and many shall fall that now are in honor.” Nowhere is this more true than in the stock market, which why Ben Graham had it as the prescript for Security Analysis.

The list of top performers may be more exciting, but the list of worst performing stock may be a more profitable hunting ground for investors.

To identify other poor performing stocks with upside in 2014, attend Tim Melvin’s free webinar on Tuesday, January 21st at 4:30pm ET and learn his methodology.  All registrants will receive a recorded copy so be sure to register now..

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Six ratios say this market is very overbought

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By Mark Hulbert, MarketWatch.


The U.S. stock market is more overvalued than it was at the majority of the past century’s peaks, according to six well-known valuation ratios.
That doesn’t mean the bull market is coming to an end, of course, since some past bull markets were even more overvalued when they topped out. Furthermore, no two market peaks behave the same way.
2014 Stock Market Overbought

Nevertheless, the evidence suggests that risks are high. You may want to consider selling some of your stock holdings and building up cash.


To compare current valuations to those that prevailed at past market tops, I relied on a comprehensive list of past bull-market tops compiled by Ned Davis Research. The list is based on a set of criteria focusing on the speed, magnitude and length of market movements.According to the firm, there have been 35 bull-market tops since 1900. The Dow Jones Industrial Average lost an average of 31% in the bear markets that followed.Here’s how the market stacks up to past market tops according to these six valuation ratios.

  1. Price/earnings ratio. Calculated by dividing stock price by earnings per share, this is perhaps the most widely followed of all valuation ratios. Based on the previous 12 months’ earnings, the S&P 500’s current P/E ratio is 18.6, which is higher than those that prevailed at 24 of the 35 bull market tops since 1900. (Data before 1957 are for the S&P Composite Stock Index, since the S&P 500 didn’t exist yet.)
  2. Cyclically adjusted P/E ratio. This is the version of the P/E championed by Yale University Professor Robert Shiller, the recent Nobel laureate in economics. It is calculated by dividing a company’s stock price by the average of its inflation-adjusted earnings of the preceding decade. For the S&P 500, this ratio currently stands at 25.6, which is higher than what prevailed at 29 of the 35 tops since 1900.
  3. Dividend yield. This is the percentage of a company’s stock price that is represented by its total annual dividends. Since this yield tends to fall as prices rise, and vice versa, the market should register some of its lowest readings near its tops. The S&P 500’s yield currently stands at 2.0%, which is lower than the comparable yields that prevailed at all but five of the bull-market tops since 1900.
  4. Price/sales ratio. This is calculated by dividing a company’s stock price by its per-share sales. Though it is lesser known, it still is championed by many investors because it is based on data that are less susceptible to manipulation than earnings. For the S&P 500, the price/sales ratio currently stands at 1.6, which is higher than the comparable readings that prevailed at all but two of the bull market tops since 1955, which is how far back data are available.
  5. Price/book ratio. This is another lesser-known valuation indicator, calculated by dividing a company’s stock price by its per-share book value—an accounting measure of net worth. For the S&P 500, this ratio currently stands at 2.7, which is higher than all but five of the 28 bull-market tops since the mid-1920s, which is how far back data are available.
  6. “Q” ratio. This indicator is based on research conducted by the late James Tobin, the 1981 Nobel laureate in economics. It is similar to the price/book ratio, except that book value is substituted by the replacement cost of assets.

Mr. Tobin thought this to be superior since he considered replacement cost to be better reflection of a company’s net worth than book value, which is based on assets’ original cost — no matter how far in the past those assets were acquired.

The Q ratio currently is higher than what prevailed at 31 of the 35 past market tops, according to data compiled by Stephen Wright, an economics professor at the University of London, and Andrew Smithers, founder of the U.K.-based economics-consulting firm Smithers & Co.
While each of these valuation ratios has its detractors, it is noteworthy that all six of them are currently telling a similar story. It is also worth noting that a particularly bearish message is coming from the two that, according to Messrs. Smithers and Wright, have the best historical track record — the Q ratio and the Shiller P/E.
If you agree with this bearish assessment, you should be thinking of ways to build up cash in your portfolio. At a minimum, you shouldn’t automatically reinvest the proceeds when you sell any existing stock positions.
Market timing is notoriously difficult, however, so you might choose to stick with your stock positions through thick and thin. In that event, you could still begin to shift your stock holdings toward sectors that historically have performed the best near the end of a bull market.
According to Ned Davis Research, those sectors tend to be consumer discretionary and consumer staples. Two exchange-traded funds benchmarked to those sectors are the Consumer Discretionary Select Sector SPDR XLY +0.45%  and the Consumer Staples Select Sector SPDR XLP +0.78% . They both charge annual fees of 0.18%, or $18 per $10,000 invested.
Here are the stocks in these two sectors that are most popular right now among the advisers tracked by the Hulbert Financial Digest who have beaten the stock market over the past 15 years: satellite-television provider DirecTV DTV -0.28% ; entertainment giant Walt Disney DIS -0.31% ; Kimberly-Clark KMB -.00% , the consumer-products company; fast-food giant McDonald’s MCD -1.18% ; drug distributor McKesson MCK -.00% ; PepsiCoPEP -0.80% , the beverage company; and Philip Morris International PM  -1.41% , the cigarette manufacturer. 

Mark Hulbert is the founder of Hulbert Financial Digest in Chapel Hill, N.C. He has been tracking the advice of more than 160 financial newsletters since 1980. Follow him on Twitter @MktwHulbert.


Extract from Marketwatch

Continue ReadingSix ratios say this market is very overbought