21 Stocks Down More than 20% in Q2 With Stable Fundamentals

TK All-Star posted on 06/19/12 at 04:58 PM

Alan Brochstein Looks at Laggards
The quarter is nearing an end, and it hasn’t been pretty. Through mid-June, the S&P 500 has retreated almost 5% from the 3/30 close. The punishment inflicted on stocks hasn’t been even, with almost 12% of the S&P 500 down more than 20% so far this quarter. Still, the market is clinging to gains from Q1, with the recent action looking like a correction rather than the start of a bear market. If so, this could be a good time to look for new investment ideas.

With so many stocks beaten up this quarter, it’s difficult narrow the list of potential bargains. One of the things I like to do when looking at stocks that have sold off is to check the fundamentals. Often, when the market turns, buyers will scoop up stocks that are oversold but fundamentally intact, which I define as not seeing significant reductions in earnings estimates.

As I mentioned, 59 stocks have lost more than 1/5 of their value since March. Many of these, though, are seeing deterioration in their outlook. While they may offer potential value, they may also prove to be falling knives. I used a powerful screening tool, Baseline, in order to narrow the list by focusing on companies that are expected to grow and where the analysts haven’t been cutting their earnings estimates significantly. Here are the parameters I used:

·       Member of the S&P 500
·       Q2 Price Return < -20%
·       Earnings Estimates (90 days) > -2%
·       2012 EPS Growth > 0
·       2013 EPS Growth > 0

Here are the 21 that made the cut:

The companies that made the list, which is sorted by sector and from low to high on the QTD return, aren’t recommendations. As always, you should do your own investigation before purchasing any stock.

I have shared some additional information to perhaps narrow the list further. First, in the price column, I highlighted in yellow a few stocks that are within 5% of their 52-week low, suggesting a possible technical challenge.

Several of the companies have debt that is less than their cash and investments, and I have highlighted them in green. In addition to the QTD return, I have included the YTD return as well as the 1-year return. I highlighted the four stocks up more than the S&P 500 so far this year in green, and I note that not a single one of these stocks has exceeded the 6% return of the S&P 500 over the past year.

On the far right, I have included the forward PE ratios, highlighting those below 10X, and the PE ratio relative to the 10-year median. The S&P 500 trades at 12.5X forward earnings, which is about 80% of its median. I have highlighted in green the many stocks trading at 60% or less of their 10-year medians and note that all of these stocks trade below the median.

This screen is designed to identify some potential investment opportunities where the price may have fallen more than warranted. In this case, we have identified stocks in four different economic sectors, many of which have strong balance sheets and a few of which are actually performing better than the market so far in 2012 despite recent weakness. From a valuation perspective, all of these stocks trade at a discount to their 10-year median PE ratios, many substantially. Keep in mind that screening is only an initial part of a more complete process, which includes a more thorough investigation of the company’s prospects.

Alan Brochstein
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator

Disclosure:  No Positions in any Stock Mentioned

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Posted by TK All-Star on 06/19/12 at 04:58 PM


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