Breakout

3 Zombie Stocks Poised to Rise From the Dead

Jeff Macke
Breakout

There's a fine line between "buying for the long term" and "sticking with dead money stocks until they kill your portfolio." The issue ultimately comes down to timing. Buying growth darlings at the top is recipe for disaster; getting long fallen angels at the bottom is the ultimate investing win.

How do you tell the difference? Paul Hickey, co-founder of Bespoke Investment Group thinks he has a good place to start your research. Culling the markets to find "names in the S&P500 that have seen their earnings double in the last ten years and their stock prices are down." From this handful of stocks Hickey offers Intel (INTC), Microsoft (MSFT), and Wal-Mart (WMT) as zombie stocks he likes now.

While I'm dubious about all three stocks, regarding them as stuck in investor purgatory as forgotten growth names, Hickey has three reasons why I'm wrong.

(1) After a decade of growing earnings and shrinking market caps, the stocks have become cheap by virtually any measure. The average P/E of Intel, Microsoft, and Wal-Mart is about 11x, slightly under the earnings multiple of the S&P500.

(2) Dividend yield. A basket of the Hickey Three kicks off about 3% a year. Even assuming completely flat stock prices, this seemingly modest yield is superior to most alternatives.

(3) "Nobody likes these companies," he accurately observes. Then again, nobody likes earaches but that doesn't make them attractive. There's more than ample reason to be apathetic at best about stocks that stay in a tight range for half a generation. Being bullish on unloved stocks of the world requires a catalyst.

Hickey thinks these stocks and others, like apparel makers VF Corp (VFC) and Under Armour (UA) will benefit from a slowing global economy.

"The main criteria we're looking for is companies with strong U.S. revenues that are insulated from what's going on in the rest of the world," he says.

I've got to hand it to Paul Hickey, he got me to open my mind about three stocks I've been citing as the quintessential value traps for five years. Check them out for yourself and let us know what you think.

View Comments (66)