When Are These Laggards Going To Jump In The Water?

On a year-to-date basis, the S&P 500 is up about 10%. That number grows to 50% when measuring the performance of equities from the now infamous March lows. So robust has this market rally been that stocks now hover near another, even more infamous, landmark: Pre-Lehman Brothers bankruptcy.

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Everyone has heard the old adage about a rising tide lifting all sails, but the market does a good a job of separating the wheat from the chaff (another old adage), so just because the market is rallying, it doesn't mean that all stocks have joined the party.

So what stocks have yet to join in on the party this year and are there any candidates among the group to get the ship headed in the right direction? We ran a screen that found there are 11 S&P 500 members that are down 30% or more year-to-date, and many are familiar names. Not surprisingly, six are financials, but we're going to take a look at three of these laggards from three different industry groups.

Lexmark International (NYSE: LXK) Year-To-Date Performance: -32%
Sunoco (NYSE:SUN) Year-To-Date Performance: -40%
Zions Bancorp (Nasdaq: ZION) Year-To-Date Performance: 30%

A Bad Day at the Office
It's not surprising that Lexmark is facing some mighty headwinds in this tenuous economy. The company makes printers and other office supplies, and this is an ideal way for companies to cut costs when business is sluggish. In fact, it appears Lexmark's corporate customers have been doing just that. The company reported 80% in second-quarter earnings.

Lexmark embraced a familiar strategy to keep earnings positive in the quarter: Cost cuts of its own. Lexmark pared expenses by nearly $63 million in the quarter, and company officials said they believe their business will bounce at some point.

The optimistic comments didn't stop Standard & Poor's Ratings Service from revising its outlook on Lexmark's debt to "negative," putting the rating on course to head to junk status. Moody's lowered its outlook on Lexmark's long-term debt in April, and included a negative outlook as well. Lexmark may eventually join the party of rallying stocks, but there's no telling when that's going to be and with no dividend, the stock is a hard hold as a long-term play. (Read The Debt Ratings Debate to find out how valuable debt ratings are.)

No Sunny Days for Sunoco
One group that has been hamstrung during the market rally has been oil refiners. Slackened demand for crude, combined with rising inventories, has led to a spate of dour earnings reports from the likes of Valero (NYSE:VLO), Tesoro (NYSE: TSO) and Sunoco (NYSE: SUN). Sunoco is our laggard of choice for this piece. For the second quarter, the second-largest U.S. oil refiner lost $55 million, or 47 cents a share, compared with a profit of $82 million, or 70 cents a share, a year earlier.

Sunoco has businesses outside of oil refining, such as specialty chemicals, logistics and service stations, and those units could help the company whether the demand storm facing oil refiners. The shares have shown some signs of life in the past month, up about 15%, and investors can get a 4.7% dividend yield for less than nine times forward earnings. Those traits make Sunoco worth a gander here.

Cut, Cut and Cut Some More
Times are tough, and have been for regional banks, as the market seems deeply concerned about rising loan loss provisions and the sector's exposure to commercial real estate. Zions Bancorp has not been immune to the travails of the regional banking group. The bank said in mid-2008 that it wouldn't cut its dividend as a way of preserving capital and then proceeded to pare the dividend in October.

That cut took the dividend to 32 cents a share, and another cut took Zions' payout down to the current level of four cents a share. And there could be more pain to come. Zions said on August 11 that while it has $675 million in cash on hand, that may be just enough to cover debt obligations and dividends on preferred shares the company issued to Uncle Sam after taking $1.4 billion in TARP funds. Zions went on to say in an SEC filing that its bank companies aren't generating enough cash to meet the parent' companies obligations.

One analyst said it appears increasingly likely that Zions may need to raise more cash and that makes it hard to be a fan of the stock right now. (Read Analyzing a Bank's Financial Statements to learn more tools to enhance your financial analysis.)

The Bottom Line
There's usually a reason why certain stocks get passed over during a market rally, and this trio has reasons aplenty. If forced to pick, Sunoco looks like it may be a sound bet on the basis of its recent pop and a dividend that appears fairly safe.

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