Would you pick stocks that are among the biggest losers?
The recent debacle of SNC Lavalin (SNC) (aQuebec based engineer firm) made me think of this question. To make a long (and nebulous) story short; SNC recently declared an 18% drop in profit expectations due to “unexpected losses” and “miscalculations”. The last time we heard these terms inCanada, we were talking about Nortel (NT)… I’m not saying that SNC has not hired the right accountants and that their numbers are not right. But still, it gives me shivers.
Beyond Shivers, Is There Money To Be Made From Big Losses?
We all know as investors that it is best to pick undervalued stocks. While this is not as easy as it seems (if not, we would be all millionaires!), you can still determine when a stock could be undervalued and buy it at that moment. But what happens when the stock is on a big losing streak? Are you willing to take the risk to buy a stock that seems to lose more value day after day?
People who thought it would be the case with RIM got fooled big time! Unless you were going in for a quick buy & sell within a few weeks. The stock is volatile enough to generate a 10% profit between 2 down trends. However, this is not the kind of trades I’m looking for. I haven’t done research to show major rebounds because I find it easy to double guess when you already have the answer. Instead, I tried to pulled-out 13 stocks (8 US and 5CDN) that show at least a drop of 10% over the past 52 weeks combined with a dividend yield over 2.00%. You’ll see in this chart that some of those stocks show huge drops (30%+):
Company Name Ticker Dividend Yield 52w price change (%)
Avon AVP 4.92% -31.62%
JP Morgan JPM 2.55% -10.71%
Walgreen WAG 2.71% -21.68%
Southern Copper Corporation SCCO 6.37% -21.96%
Staples SPLS 2.73% -26.40%
Best Buys BBY 2.59% -23.86%
AFLAC AFL 2.79% -16.22%
Hasbro HAS 4.08% -21.33%
Canadian Ticker Dividend Yield 52w price change (%)
SNC Lavalin (CDN) SNC 2.10% -29.80%
ScotiaBank (CDN) BNS 3.88% -10.32%
Genivar (CDN) GNV 5.31% -15.17%
Manulife (CDN) MFC 4.18% -32.08%
Husky Energy (CDN) HSE 4.59% -11.55%
I’m pretty sure that all stocks won’t go back into positive yield but I figure that this portfolio as a whole will definitely be positive in 12 months. On the US side, I actually like Avon (AVP), AFLAC (AFL), Southern Copper Corp (SCCO) and Hasbro (HAS). Avon and Hasbro are part of my Best 2012 Dividend Stock eBook because they show strong metrics for the past 5 years. AFLAC has been selected in our Dividend Growth Index and I think that they can show some strong results. Finally, Southern Copper has suffered from a drop in copper prices. Since I’m a believer in a bullish market, we will definitely see copper prices rise again.
On the Canadian side, my favorites are ScotiaBank (BNS), Genivar (GNV) and Husky Energy (HSE). ScotiaBank has been showing some strong financial results and should be increasing its dividend soon. Genivar has been growing aggressively through acquisitions for the past 5 years and I expect them to continue to get a lot of contracts from the Canadian Government. As for Husky, it seems to be back on an uptrend recently due to good financial results. Their income should flatten in 2011 but the price of oil may give them a push in the right direction. At a 4.59% dividend yield, I think it is still a great deal.
Potential Upside for Dividend Investors
The potential of picking “falling knives” are huge for any kind of investor. But for dividend investors, there is an additional twist to the equation; the dividend yield! Imagine investors who had the guts to buy Canadian Banks back in December 2008; they currently have solid blue chips paying 20%-25% dividends!
If you can select stocks that will bounce back, you will either have the choice of cashing in important profits or keeping a company paying a huge dividend yield compared to its history. This sounds very appealing!
Potential Downside for Dividend Investors
If a stock is dropping like a rock, there must be a reason. Sometimes it is based on major concerns that are being resolved and everybody will smile again after a while. Unfortunately, this is rarely the case. In most cases, stocks dropping like stones continue to sink and never get back to their golden days. I got burnt when I bought RIM on this rationale (it can’t go lower anymore!). Oh boy was I wrong!
This is why I tend to ignore the greedy devil inside of me when I see “undervalued” stocks falling like there is no tomorrow. Speculative picks rarely made great investing decisions! Don’t be fooled by a low P/E ratio or a high dividend rate, dig a little further before you pull the trigger.
Are You Positive or Negative?
Picking stocks among the biggest losers is definitely an interesting strategy. However, one must be able to put his emotions aside in order to make sound investing decisions. On the other hand, there are investors who prefer to surf the wave as it is growing. This why they are looking for up trending stocks and hope to get off the wave before it breaks. If you are one of them, I’d suggest you take a peek at the top 50 trending stocks on the market right now (the list is updated frequently).
As for myself, I am picking stocks that I like during bear markets (as I did in August 2010). As for individual movements, I try to step aside from both up and down trends!
Disclaimer: I own shares ofBNSandHSE.
If the fundamentals of the business (stock) are not deteriorating, then I will buy more “when they become on sale”. And, I will only do this with good strong blue chip dividend payers!
@Michel,
You just said the “keyword” : Fundamentals!
For dividend investing I would stick with stick with the good names. there’s no reason to catch knifes when the selection of good companies is so vast. I like BPF.un which currently has a 6.67% yield and has appreciated a bit recently too
full disclosure I tried to buy some but the spread jumped me and I never went back
Great post !
I see this as an excellent way to find undervalued stocks that have the potential to pay big dividends in the future, and provide significant yield on cost (20% or more), while rising.
Your example of Canadian bank stocks is a good one. Personally, I have increased my holding of BAC, which, while it has a nominal dividend at the moment, is poised to begin raising it and buying back stock. I see $2 EPS possible in 2014 with $0.60 dividends, which represent a 10% yield on cost and a 33% earnings yield for me with the expectation that those dividends will rise over time to $1 or more.