The stock market was none too pleased with the earnings reports from Bank of America (BAC), Citigroup (C) and General Electric (GE). I was quite surprised that the trio, which are the most heavily traded stocks on the market, jolted investors as they did. I think all three are a buy.
Not to leave out any of the recently orphaned stocks, let's add three more bad boys to the picture: BP (BP), Goldman Sachs (GS) and Transocean (RIG). They have been hurt by the misdeeds of management, which resulted in crushing blows to shareholders. These three stocks are very scary: The prospects for a turnaround remain bleak in most everyone's eyes, with little chance of the negative headlines or business improvement changing the outlook anytime soon. Could the timing be right to buy these monsters too?
BAC has been lynched to the tune of 29.6% off its 52-week high of $19.86. Citi has lost an uncivilized 28.18% off its high of $5.43. GE has powered down 26.14% from a high of $19.70. Tarnished Goldman is now off 24.5% from its high of $193.60. BP spilled 40.53% from its already leaky reputation and a high of $62.38. Finally, RIG has sunk 45.11% from its very strong earlier performance and a 52-week high of $94.88.
The average decline for the group is 32.34% -- or 2.5 times more than the decline of the S&P 500 from its high. (The S&P 500 closed Friday at 1,064.88, down 12.7% from its lofty 52-week high of 1,219.80.)
The idea of jumping out of the frying pan and into the fire on purpose would be quite a spectacle at a circus, but would investors want to do it with their hard earned money? Definitely not. And yet, for better or worse, I have ignored the caution flags and done just that.
I will go on record here and now and say that I think these pariahs will outperform the market over the next year by a wide margin. They will outperform because everyone hates them. They will outperform because everyone is expecting the worst. They will outperform because any positive surprise anywhere along the line will propel them forward more than any negative news will trample them. Expectations for these six stink! So I have placed my bets.
Here are the closing prices from last Friday July 16, 2010:
- Bank of America: $13.98
- Citigroup: $3.90
- General Electric: $14.55
- BP: $37.10
- Goldman Sachs: $146.17
- Transocean: $52.08
Goldman has agreed to a massive settlement with the SEC, and hopes to clean up its act and its reputation -- a work in progress. BP is in never-never land and does not know if it will lose a hand or make it back to someplace warm and cozy. The answer is most likely somewhere in the middle. Transocean just needs time. It has been crushed because its name has been linked so closely to BP's, but its earnings power has not been harmed as much as its stock price.
So here is my foot-in-the-mouth best wild guess as to what will happen over the next twelve months to this group based on market sentiment alone and buying on fear: One will be down; one will go nowhere; and four will be up 20% or more. The strategy is to buy equal amounts of all six.
|You're right, they will outperform.||575 (85.7%)|
|You're wrong, they will suffer the fate they should and collapse further.||15 (2.2%)|
|As a group, they will perform inline with the market.||54 (8.0%)|
|You're out of your mind for risking anything on this group -- no matter the opportunity.||27 (4.0%)|
As always I will report the results periodically, even if it becomes highly embarrassing.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: He owns shares and/or options in all of the stocks mentioned.