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., Getty Realty Corp. and ValueClick Inc.
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., 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. 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., 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., 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.)
