7 Battered Stocks Set to Rebound in 2018

When the markets open on January 2, investors might consider buying shares of the biggest losers in 2017, Barron's reports. Based on history, these stocks may enjoy big rebounds in 2018. Right now, seven prime candidates are: retailers Macy's Inc. (M), Kroger Co. (KR) and Foot Locker Inc. (FL); loan servicer Navient Corp. (NAVI); industrial and financial conglomerate General Electric Co. (GE); entertainment content provider Viacom Inc. (VIAB); and airline Alaska Air Group Inc. (ALK).

Screening Method

Barron's columnist Mark Hulbert searched for the 10 S&P 500 stocks with the biggest year-to-date losses through October 27, and with prices lower than 24 months before. They had to be reasonably sound businesses, not headed for bankruptcy, paying dividends, and with below-market forward P/E ratios and price to book value (P/B) ratios.

Hulbert modeled this process on one developed by George Putnam, editor of the Turnaround Letter. Putnam cited GE as a particularly interesting case in his interview with Barron's. He feels that the stock has underappreciated potential for a turnaround. The new CEO impresses him with a bold plan to toss aside failed strategies and thus improve the company's operating performance.

Big Losers

Through Friday, November 3, the respective year-to-date and 24-month price moves on the seven stocks listed above are: Macy's, -46%, -60%; Kroger, -37%, -40%; Foot Locker, -57%, -55%; Navient, -23%, +1%; GE, -35%, -28%; Viacom, -33%, -47%; and Alaska Air, -28%, -16%. Navient had been down by 2.8% for the 24 months through October 27, the end date for Hulbert's analysis.

The respective dividend yields and forward P/E ratios on these stocks are, per Thomson Reuters data reported by Yahoo Finance: Macy's, 7.7%, 7.1; Kroger, 2.4%, 10.9; Foot Locker, 3.8%, 7.5; Navient, 5.3%, 7.8; GE, 4.5%, 17.3; Viacom, 3.2%, 6.0; and Alaska Air, 1.8%, 9.6.

Macy's and Foot Locker should elicit extra caution, since they are under relentless attack from online retailing colossus Amazon.com Inc. (AMZN). Though primarily known as an operator of supermarkets, Kroger also owns several jewelry store chains and some of its store brands sell general merchandise and clothing in addition to groceries.

Strategic Rationale

In December, investors with net realized capital gains often sell stocks that have experienced losses, to reduce their income tax liability. This tax-loss selling typically drives the prices of these stocks down yet more. Losing stocks also face selling pressure from "window dressing" by investment managers, especially mutual fund managers, who do not want them in their year-end portfolio reports.

Losing stocks get so beaten-down by year-end that they often become bargains at the start of the next year, and frequently bounce back in price, per Putnam's research. This time, he says that the rebound may be particularly strong. The record-setting markets have produced significant gains for many investors, driving that tax-loss selling should be especially intense. Putnam adds that tax reform should have no impact, since passage of a bill before the end of the year is highly unlikely, and any changes should not be retroactive to 2017. (For more, see also: Traders Profit on Collapse of Retail Stocks.)

Past Performance

The Turnaround Letter's annual model portfolio has delivered an average annual total return including dividends of 11.9%, versus 10.6% for the S&Ps 500 Index (SPX), per Hulbert's calculations presented in Barron's. The seven rebound candidates that Putnam recommended last year produced an average gain of 8.0% from his early December publication date through the end of January, versus 3.0% for the S&P 500, Hulbert writes. Sometimes patience is needed. Putnam's picks in December 2015 did not turn a profit until March 2016, since the markets dipped in January, Hulbert adds.

Hulbert calls Putnam "one of the select few advisors I follow who has beaten the stock market on a real-world basis over the long term." The Hulbert Financial Digest, published from 1980 to 2016, did pioneering work in evaluating the performance of investment advisory newsletters.

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