John Dorfman
Last month, Best Buy Co., the
world’s largest consumer electronics retailer, reported fourth-
quarter diluted earnings of $1.62 a share, 11 percent less than
a year ago. Slam! The stock fell 9 percent in two days, and 16
percent in the first quarter.
That lands Best Buy a spot on my Casualty List, a periodic
list of stocks that have been pummeled and that I think have
excellent potential to show strong gains in the next 12 months.
After being hit in the first quarter, the company’s stock
trades for eight times earnings. Its average price/earnings
ratio over the past 10 years was 18. I’d say its shares are on
sale. Best Buy, based in Richfield, Minnesota, has made a profit
every year since 1992.
To be sure, a weakening of the economy could derail the
stock. However, I think the economy is still strengthening. A
leading retailer of discretionary items seems to me a good stock
to own during an ongoing economic recovery.
In the first quarter, the Standard & Poor’s 500 Index rose
5.9 percent, including dividends. To be eligible for the
Casualty List, a stock had to decline at least 7 percent for the
quarter. Of the 2,339 U.S. stocks with a market value of more
than $500 million, 225 dropped that much.
Online Travel
From that black-and-blue group, I’ve selected four to
recommend. In addition to Best Buy, they are Expedia Inc. (EXPE), Getty
Realty Corp. (GTY) and ValueClick Inc. (VCLK)
Expedia, which says it is the world’s largest online travel
company, fell 9 percent in the first quarter, including
dividends. The U.S. Transportation Department told online travel
companies in February that they can’t show bias in the display
of flight and fare information, even if they have a business
dispute with a particular airline.
Expedia had dropped American Airlines fare information from
its website on Jan. 1, after the carrier started its Direct
Connect system, which seemed likely to reduce the role of online
intermediaries such as Expedia.
Fourth-quarter earnings of 25 cents a share fell short of
analysts’ estimates, compounding Expedia’s problems.
To me, these look like mere speed bumps in the road. I
believe that online services will continue to expand their share
of the travel business because the traditional travel-agent
model is flawed. Agents generally make more money by
recommending expensive hotels and flights than cheap ones.
Record Revenue
With the largest market share among the online travel
services, Bellevue, Washington-based Expedia should benefit from
this growth. Its revenue last year topped $3 billion for the
first time.
One of the biggest losers in the quarter was Getty Realty,
down 25 percent, even after taking into account its large
dividend. The company, with headquarters in Jericho, New York,
is a real estate investment trust that owns more than 950
properties. It leases its sites primarily to gas stations, of
which about three-quarters are Getty stations.
Getty Realty shares currently yield 8.4 percent in
dividends compared with the S&P 500’s average of 1.8 percent.
Getty Realty’s problem is a change in control at Getty Petroleum
Marketing Inc., its biggest tenant. OAO Lukoil, Russia’s second-
biggest oil company, had owned Getty Petroleum Marketing. In
February it sold the company to little-known Cambridge Petroleum
Holding Inc.
Muddling Along
Investors figure that Cambridge lacks the financial muscle
of Lukoil and may need to retrench, leaving Getty Realty
scrambling for tenants. It’s a reasonable fear, yet I think
Getty Realty will muddle through.
ValueClick, a Westlake Village, California, company that
facilitates online advertising, was less severely harmed, down
10 percent for the quarter. Its systems enable advertisers to
pay in direct proportion to the number of times consumers click
on an ad.
The company’s 2010 earnings set a record, and yet analysts
and investors have been cool toward the stock. Of the 20
analysts who follow the stock, only five recommend it. One
positive factor to which they don’t give enough weight, in my
opinion, is ValueClick’s enviable balance sheet, with no debt
and $194 million in cash or near cash.
Some follow-up on the Casualty List recommendations from 12
months ago might be appropriate. Here’s a quick look, in
alphabetical order.
Coeur d’Alene Mines Corp. (CDE), a silver miner based in Coeur
d’Alene, Idaho, rose 132 percent in the 12 months through March
31, after tumbling 17 percent in the first quarter of 2010. I
wouldn’t chase it at current prices.
Too Early
Goodrich Petroleum Corp. (GDP) of Houston, on the casualty list a
year ago with a 36 percent loss, has bounced back with a 42
percent gain. At about $22 a share, I don’t find it compelling.
Nutrisystem Inc. (NTRI), which dropped 42 percent in the first
quarter last year, has fallen an additional 16 percent, taking
dividends into account. Being a year early is the same as being
wrong, but I still like this Fort Washington, Pennsylvania-based
company. Millions of Americans are overweight, including yours
truly. Its shares trade at 13 times earnings.
Piper Jaffray Cos. (PJC), a Minneapolis-based brokerage house and
investment bank, fell 20 percent in last year’s first quarter.
Since then it has inched up about 3 percent. I still like it,
partly because the stock sells for less than book value, or
assets minus liabilities per share.
Disclosure note: I own shares in Piper Jaffray for clients
and personally. I have no long or short positions in the other
stocks mentioned in this week’s column.
(John Dorfman, chairman of Thunderstorm Capital in Boston,
is a columnist for Bloomberg News. The opinions expressed are
his own. His firm or clients may own or trade securities
discussed in this column.)
To contact the writer of this column:
John Dorfman at
jdorfman@thunderstormcapital.com
To contact the editor responsible for this column:
James Greiff at jgreiff@bloomberg.net