Stocks that have done nothing for years are often called dead money by investors. Many dead money stocks are value traps that lure investors in only to frustrate them. But there are a few turnaround candidates that can perform strongly, and Barron’s is using a stock screen to predict which dead money stocks are ready to come alive.
The recent lead-coated telecom cable issues reported on by The Wall Street Journal have thrown into sharp relief the issue of dead money. Verizon (ticker: VZ) and
AT&T
(T) shares are down 11% and 16%, respectively over the past three months, leaving both with single-digit price-to-earnings ratios and near-8% dividend yields. Tantalizing, but those two have lost investors about 4% a year on average for the past five years while the
S&P 500
and
Dow Jones Industrial Average
have returned about 11% and 9% a year on average, respectively.
Are they ready to turn around though? Wall Street doesn’t think so. About 19% of analysts covering Verizon stock rate shares a Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. What’s more the Buy-rating ratio for Verizon shares is essentially unchanged over the past year. Not a very compelling case for a turn.
The metrics for AT&T stock look similar although 30% of analysts covering its shares rate them a Buy, a little higher than Verizon.
Other stagnant stocks are more promising. Barron’s looked at stocks in the
Russell 3000 Index
that have done, essentially, nothing for the past five years and identified 10 stocks where improving analyst sentiment could signal better days ahead.
The 10 in no particular order are: motorcycle maker
Harley-Davidson
(HOG), packaged food maker
TreeHouse Foods
(THS), biotech firm
Biocryst Pharmaceuticals
(BCRX), investment bank
Lazard
(LAZ), lawn care giant
Scotts Miracle-Gro
(SMG), biotech
Biogen
(BIIB), lubricant maker
Quaker Chemical
(KWR), trust bank
Bank of New Your Mellon
(BK), music streaming service
Spotify Technology
(SPOT), and
United Airlines
(UAL).
Average annual returns for the group for the past five years have ranged from a 1% gain to an 8% loss. Not very good, but analysts are warming up to the names. The average Buy-rating ratio for the 10 is now about 62%, up 19 percentage points from 43% over the past year.
| Company / Ticker | Market Cap (bil) | Recent Price | 2024E P/E | Buy-Rating Ratio W% | Year-Ago Ratio |
|---|---|---|---|---|---|
| Harley-Davidson / HOG | $4.9 | $34.76 | 7.0 | 56% | 35% |
| TreeHouse Foods / THS | 2.7 | 47.68 | 16.2 | 57 | 43 |
| Biocryst / BCRX | .4 | 7.14 | n/a | 64 | 42 |
| Lazard / LAZ | 3.9 | 34.4 | 9.4 | 56 | 44 |
| Scotts / SMG | 2.9 | 51.44 | 14.3 | 64 | 40 |
| Biogen / BIIB | 39.5 | 272.74 | 16.6 | 71 | 48 |
| Quaker / KWR | 3.1 | 169.87 | 19.5 | 67 | 50 |
| Spotify / SPOT | 27.1 | 139.38 | n/a | 61 | 50 |
| BONY / BK | 35.2 | 45.18 | 8.9 | 59 | 39 |
| United / UAL | 17.2 | 52.31 | 4.4 | 68 | 42 |
E=estimate
Sources: Bloomberg, FactSet
For the most part, the 10 is a list of value stocks. The average price to estimated 2024 earnings is about 12 times, below the market’s 18 times multiple. That shouldn’t surprise investors. Dead money stocks often have low PE ratios, another thing that tantalizes investors before they realize the stocks are cheap for a reason because of, say, peak profits in a cyclical industry or because of a declining business.
Why the Street is getting more positive on the stocks isn’t easy to identify. Few of the 10 have increasing earnings estimates, a positive sign for stocks. United and Quaker, however, are seeing analysts take earnings estimates for 2024 higher. Lazard has some management changes pending. New CEOs and top managers can be a signal to reevaluate stocks. TreeHouse took up full-year 2023 financial guidance when it reported second-quarter numbers in early August.
Why the Street is getting more optimistic is beside the point. Overall, things are looking better to analysts, the ones paid to follow the companies closely.
A stock screen, of course, is only a start to narrow the possible list of new investments. After a screen is when the real work of investing begins.
Write to Al Root at [email protected]
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