By Tim Melvin
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..