Ah, that special time of year. The holidays are done, football season may as well be, and the prospect of baseball is a mere specter of a whiff of fresh-cut grass and hot dogs on the other side of all the ice and snow yet to come...
You'll have to forgive me for waxing poetic. On the other hand, I'm not doing it to sell you something... unlike the tidal wave of breathless prose currently inundating inboxes, courtesy of Wall Street and its good buddies in the mainstream financial media.
That's right: Investment clickbait season is here. Everywhere I look, I see "predictions" for 2018.
"Nine stocks to make all your dreams come true!" "One stock to rule them all in 2018!"
"Three stocks to profit from the 2018 zombie apocalypse!" "Six Trump-proof stocks!" "When this stock triples in 2018, thank Trump!"
My inbox is stuffed with these pitches, and they are all pretty much the same: lists of stocks with fantastic stories, peppered with some pithy quotes from an analyst or CEO about why this company is going to make your hopes and dreams a reality.
Some of them are even pretty well written. But almost universally, they are poorly researched, and fatally short on clear-eyed analysis of a company's prospects and financial condition.
You can safely throw them out, and grab a real winner like the one I researched, which I'll show you instead...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
I Just Caught Some Really Tempting Clickbait - Maybe You Did, Too
My son-in-law forwarded me an article the other day, from CNBC, no less. It was all about the poor performers in the S&P 500 in 2017, and why they might be a great speculative play for a significant rebound in 2018.
Urgent: This almost universal blunder could cost you $1.9 million in lost profits in 2018. Click here now...
That almost makes sense, because these kinds of companies tend to have larger capitalizations, and there can be some reversion to the mean at play.
But that ignores one very, very important fact...
You see, we'd best keep in mind that 2017 was the "Year of the Index Fund," to the tune of more than $250 billion by the middle of that year.
And I mean, the index funds moved through the markets like gigantic blue whales with their mouths open, sucking in (nearly) all equities like so much krill and bidding up prices all the while.
So it stands to reason that, if a company was crappy enough that selling pressure overwhelmed the big, dumb, cash-bloated index whale, then it was crappy indeed.
Sometimes, cheap things are cheap for a very good reason.
Let's keep this uppermost in our minds while we look at some of the "turnarounds" the financial media are hawking right now.
And let's also remember that these companies drastically underperformed in a record year when the S&P 500 exploded through its average full-year return by mid-June.
Then, just to be different, we'll use, you know, actual numbers and facts instead of glowing language...
Here's the Media's Pick... and a Real One
The absolute worst performer on CNBC's list was Foot Locker Inc. (NYSE: FL), down a tidy 33% on the year.
The numbers here are not horrible.
Foot Locker trades with an EV/EBIT multiple of just 6.25. The Piotroski F-score is an acceptable six, and the Altman Z-score of over seven tells us that there's little chance of out-and-out financial distress.
What I do not like is the 1% five-year earnings growth estimate and the fact that institutional holdings dropped by almost 10% in the third quarter.
The numbers for Foot Locker tell me that this is a "meh, okay" kind of business with a chance for near-term improvement but little long-term upside. The more than 500 million in free cash flow the company produced last year along with very low debt level might make this very attractive to a private equity buyer, who could use the free cash flow to lever up the balance sheet, but I don't think they'd be willing to pay much more than the current price.
So, Foot Locker is a not a horrible selection for 2018, but you know me by now: I like all of my investments to at least have the potential of unreasonably huge five-year returns...
...and I just do not see that here.
So what to buy instead of Foot Locker?
I don't know anything about athletic shoe-buying habits - I wear Catalinas - so... I won't try and pick another shoe stock.
Let Me Show You What to Buy Instead
Small appliances. I understand small appliances. I ran across this company earlier this week and went down to the kitchen and counted how many Hamilton Beach Brands Holding Co. (NYSE: HBB) gadgets we owned. My wife does a lot of cooking and baking, so I wasn't surprised to find that we have a mixer, a coffee pot, a crock pot, and an electric knife from the iconic kitchen appliance company in our possession.
That might sound deceptively simplistic: I find we've got a lot of Hamilton Beach gear in our kitchen, so I recommend Hamilton Beach.
Here's the thing... if Hamilton Beach is ubiquitous in my kitchen - if they make the can't-live-without gadgets my wife and I use - how many tens of millions of other kitchens are they in?
A lot, it turns out. But that's not the only reason why I like this company.
Hamilton Beach was spun off from its former parent company, NACCO Industries, back in September.
I love spin-off stocks, as they tend to be ignored by Wall Street. Investors in the former parent just sell their new shares without much thought at all.
Spin-off stocks are one of the wildly profitable "dark corners" of the market, and Hamilton Beach is a very attractive resident of the particular corner.
We are buying a world-class global company at an enterprise multiple of just five times operating earnings.
Hamilton Beach is expanding in fast-growing Asian and Latin American markets, where a middle class is emerging that's likely to put the once-vaunted American middle class to shame.
They will be able to continue growing in the commercial markets with both Hamilton Beach Commercial and Proctor Silex Commercial over the next few years. They already have a strong e-commerce position, so the slow down at brick-and-mortar locations will not impact them at all.
Hamilton Beach has the potential to be one of those undervalued companies that become a growth stock leader over the next several years.
Not only is management experienced, with many of the executives with the company for decades, but the leadership have some serious skin in the game.
Officers and directors of Hamilton Beach own more than 32% of the company. For them to cash in on their holdings, they have to make us money right along with them. That's why inside ownership is such an important number to consider when looking at companies you want to own.
So, contrary to the narrative being pitched at top volume right now, a fallen stock does not a must-own stock make.
Even putting that concept up to the slightest scrutiny just shatters it: What goes down must come up? No. It may revert to the mean, or it may fall deeper into the tar pits of financial mediocrity and distress. The story may make sense, it may tug at your heartstrings, it may stimulate your hope and greed centers, but it's the numbers that matter.
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About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.