2017 has been a great year for the broad markets – but not every stock has joined the fun. Retailers of all stripes, even with a recent rally, have struggled. Oil and gas plays have been choppy. Many healthcare stocks have been weak, with notable declines for Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) and Celgene Corporation (NASDAQ:CELG), among others.
Even in tech, where the large-cap FANG stocks have soared, smaller stocks and, in particular, hardware companies haven’t necessarily kept up. All told, even though market headlines have screamed good news, a lot of stocks have been left out in the cold.
These 10 stocks all are in that group, having declined so far in 2017. But all 10 also provide reason to believe that 2018 will be a better, more positive, year.
2017 Losers That Will Be Stocks to Buy: Kraft Heinz (KHC)
Source: Mike Mozart via Flickr
YTD Decline: -10%
A 10% drop in Kraft Heinz Co (NASDAQ:KHC) doesn’t sound like all that much, but in the context of a roaring broad market and what should be a stable trading pattern, it is.
Indeed, after touching an all-time high above $97 in February, KHC has gone almost straight down. It had fallen a whopping 23% by the time it touched a 20-month low in late October. KHC did bounce after solid, if unspectacular, earnings on Nov. 1 — but it has pulled back once again over the past few sessions.
There is some logic behind the declines. Concerns about pricing at supermarkets first pressured the retailers — and then came for suppliers like Kraft Heinz. Private-label penetration continues to increase. Organic net sales were down 1.1% through the first nine months of the year, though Kraft Heinz did manage to wring out a 0.3% gain in Q3.
But from a long-term standpoint, KHC looks awfully attractive. I argued in October, just before KHC touched its YTD low, that it was a stock to buy and hold for the rest of your life. I still think that’s the case. A 3.2% dividend yield provides income, and a 20x forward EPS multiple provides a notable discount to other consumer-facing large-caps like Procter & Gamble Co (NYSE:PG) and The Coca-Cola Co (NYSE:KO).
The concerns here are relatively short-term; from a long-term standpoint, Kraft Heinz looks like a strong buy. And I fully expect the market will realize that come 2018.
2017 Losers That Will Be Stocks to Buy: Allergan (AGN)
Source: Everjean via Flickr
YTD Decline: -19%
Allergan Plc (NYSE:AGN) is the latest pharmaceutical stock to be taken out to the woodshed. While its 19% decline YTD isn’t quite as bad as recent declines at Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA), that’s of little comfort to Allergan shareholders. AGN stock now sits at its lowest level in almost four years.
Here, too, the declines make some sense. (In this kind of market, indiscriminate sell-offs are tough to find.) Dry-eye treatment Restatis is facing new competition; more concerningly, so is flagship product Botox. Management has projected an earnings “reset”, with 2018 EPS guided to at least $15, well below prior projections.
But the sell-off looks overdone, as Morgan Stanley argued in upgrading the stock just two weeks ago. Allergan still has an enormous, diversified portfolio. If its controversial and innovative patent strategy holds up, some of that competition may be deferred. The balance sheet is nowhere near as heavy as that of Teva. And AGN stock now looks downright cheap, trading at less than 11x 2018 EPS.
It’s risky to try and time the bottom, as drug stock investors have learned elsewhere of late. But there’s still a lot of value in Allergan — and eventually investors will remember that key fact.
2017 Losers That Will Be Stocks to Buy: Chesapeake Energy (CHK)
Source: Philadelphia 76ers Via Flickr
YTD Decline: -46%
I’ve been bullish on Chesapeake Energy Corporation (NYSE:CHK) for much of the year — even going back to May, when the stock still traded above $5. So far, I’ve been wrong — even though the energy prices I thought would help the stock have cooperated, at least somewhat.
But I’m sticking with my bull call, particularly with the stock pulling back toward a $3.50 level that’s proven to be support so far this year. The bull case for CHK does have some cracks, as I wrote last month. Still, at these levels, the risk/reward looks awful tempting. And though 2017 hasn’t been great for Chesapeake stock, Chesapeake has made some progress as a company.
Debt continues to come down, although perhaps not at the rate some investors hoped. Chesapeake continues to refine its drilling processes, and continues to improve output per well. In 2018, the company should be able to achieve positive cash flow, and there is the potential for further asset sales that will improve the balance sheet.
This remains a high-risk play, as it has been for years now, and as 2017 performance shows. Another leg down in oil and/or gas prices could push CHK back toward early 2016 lows near $2. But the potential reward is high, too. The same debt that creates downside risk will leverage upside if investor sentiment changes and/or energy prices rise again.
All told, I don’t think the Chesapeake story is quite over yet. And, at the least, I expect 2018 will be a better year — though, admittedly, that’s a low bar to clear.
2017 Losers That Will Be Stocks to Buy: Veritiv (VRTV)
YTD Decline: -49%
Veritiv Corp (NYSE:VRTV) has been one of the market’s most frustrating stocks this year — and as a VRTV shareholder, I should know. Dollar-cost averaging and a recent, modest bounce have eased the pain somewhat. But VRTV has posted declines of 19.3%, 18.4%, and 20.3% after its last three earnings report, and a total 56% drop from all-time highs reached in March.
There’s still downside risk here. Veritiv’s debt load is a major issue. The company’s Print and Publishing segments unsurprisingly are declining quickly. Free cash flow guidance for 2017 was brought down to basically zero after Q3, because the company is having trouble collecting receivables from struggling customers. Management concerns have built as the year has moved on, with Veritiv lowering full-year EBITDA guidance after Q3 — long after the market already had figured out the company’s projections were far too optimistic.
But there’s still hope for a rally in 2018 (he wrote hopefully). The Packaging business is driving an increasing proportion of sales and profits as the paper and print segments fade. Management is guiding for increased profits in 2018 (though that projection needs to be taken with a shaker full of salt). Investments this year should pay off next year, and VRTV remains a favorite of well-known investors like Baupost’s Seth Klarman.
There is a reason VRTV touched $60 earlier this year. And while that price certainly was too optimistic, and I don’t expect a return to those levels any time soon, the bull case isn’t dead, either. Any sort of stabilization in 2018 should allow VRTV to rebound.
2017 Losers That Will Be Stocks to Buy: AZZ (AZZ)
Source: Riccardo Annandale Via Unsplash
YTD Decline: -24%
It has been an ugly stretch for AZZ Inc (NYSE:AZZ). In fiscal 2017 (ending February), revenue fell almost 5%, and EPS declined 21%. Guidance for fiscal 2018 was cut after the Q4 FY17 report — and again in September, just ahead of Q2 earnings.
But there are some short-term issues here. The company’s Energy segment is struggling with choppiness in end markets — specifically, nuclear. The Westinghouse bankruptcy has caused problems — including the scuttling of a deal for AZZ’s nuclear business. The company’s Galvanizing segment is performing better — but not well.
Those issues will pass — and AZZ should benefit. Galvanizing rival Valmont Industries, Inc. (NYSE:VMI) is seeing similar challenges in its Coatings segment, which suggests that AZZ isn’t necessarily losing share. Operational improvements should be on the way in both businesses. Management already is looking toward fiscal 2019 — but investors aren’t following. Come next year, they should — and a longer-term perspective should do wonders for AZZ stock.
2017 Losers That Will Be Stocks to Buy: Twilio (TWLO)
Source: Web Summit Via Flickr
YTD Decline: -13%
One of last year’s hottest IPOs has stalled out this year. Cloud communications provider Twilio Inc (NYSE:TWLO) now trades below the price reached on its first day of trading — when it gained 90% from an IPO price of $15.
But the growth story here remains intact. 41% revenue growth in Q3 beat analyst expectations handily. Partnerships with Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT) should help growth in 2018 — and beyond.
Admittedly, performance has been choppy. The decision by key customer Uber to diversify its sourcing rattled TWLO stock earlier this year. TWLO isn’t profitable — and it isn’t cheap, either. But a ~5x EV/revenue multiple, in the context of likely ~40% growth this year, isn’t all that onerous given the long-term opportunity here.
In short, the Q3 numbers showed Twilio is back on the right path – but the market largely shrugged those numbers off. But one more impressive report in February will be too much for investors to ignore.
2017 Losers That Will Be Stocks to Buy: IBM (IBM)
YTD Decline: -7%
Admittedly, International Business Machines Corp. (NYSE:IBM) has been a “next year” story. With the exception of a 20% gain in 2016, it has been mostly straight down for IBM from 2013 highs around $215.
But there are signs that IBM is starting to get it together. Valuation is such that a good amount of downside is priced in. The company is starting to have some success in cloud, and the cycle is moving behind the mainframe business for the first time in quite a while.
The best outcome here is for IBM stock to parallel the rise of MSFT or Intel Corporation (NASDAQ:INTC). A one-time giant, seemingly left behind amid technological change, regains its footing — and sees earnings and multiples rise at a result. It’s far from guaranteed that IBM will get there — but it has a shot to do so. And even that possibility should get priced in — and help IBM stock next year.
2017 Losers That Will Be Stocks to Buy: Photronics (PLAB)
YTD Decline: -24%
Small-cap Photronics, Inc. (NASDAQ:PLAB) makes photomasks — tools used in the manufacturing of semiconductors and flat-panel displays. That would seem to position the company well at the moment. Chip stocks have soared this year, even with a recent pullback. Increasing OLED penetration in products such as the Apple Inc. (NASDAQ:AAPL) iPhone similarly would seem to bode well. Universal Display Corporation (NASDAQ:OLED) stock has tripled, for instance, and though UDC is not a customer of Photronics, it is a sign of the growth in that end market.
And yet PLAB stock has struggled. A late-summer dip led the stock to a two-year low. Even after a rebound, the stock still hasn’t moved much in four years — and, as noted, is down over 20% so far in 2017. Part of the problem is the tough nature of the photomask model. Capital expenditures are high and constant, as the company needs to continually upgrade its manufacturing capabilities. “Captive” manufacturers — in-house operations at companies like Intel Corporation (NASDAQ:INTC) — providing increasing competition.
Still, PLAB looks intriguing at current multiples. The stock is cheap, for one. A huge pile of overseas cash could be repatriated if tax reform goes through. A joint venture in China gives access to that potentially lucrative market, and trends still are moving in the company’s favor.
At these levels, Photronics doesn’t need all of those tailwinds to bear fruit. With a break or two, PLAB should rebound next year, and potentially charge back into the double-digits.
2017 Losers That Will Be Stocks to Buy: Newell Brands (NWL)
YTD Decline: -30%
Newell Brands Inc (NYSE:NWL) owns a collection of iconic American brands: Sharpie pens, Elmer’s glue, Coleman lanterns, Rubbermaid containers and many, many more. So far in 2017, however, those brands have done little to help NWL stock.
Here, too, there are concerns. Newell Brands’ debt load is rather heavy. The stock plunged 27% after disappointing Q3 results that included a full-year guidance cut and discussion of challenges relating to both costs and pricing. Newell’s M&A strategy has been hit-or-miss at best, and in key categories like coolers and containers it seems behind the trend.
But all hope isn’t lost — and NWL looks downright cheap. The stock trades at barely 10x the revised guidance, and offers a nearly 3% dividend to boot.
Last month, InvestorPlace contributor Will Ashworth called NWL one of 9 stocks to buy on the dip, and I’m inclined to agree. The bounce after the Q3 sell-off already has begun, and I expect it will continue into 2018.
2017 Losers That Will Be Stocks to Buy: Cincinnati Bell (CBB)
YTD Decline: -7%
The last of the Baby Bells, Cincinnati Bell Inc. (NYSE:CBB) is quietly — and successfully — evolving into an intriguing play on the future of communications. Cincinnati Bell already has added exceptional high-speed fiber to much of the Cincinnati metro, and is taking share from local cable operator Charter Communications Inc (NASDAQ:CHTR). It’s expanding that strategy with its pending acquisition of Hawaiian Telcom HoldCo Inc (NASDAQ:HCOM), which should close next year.
Of late, growth has been rather muted, and for the most part CBB’s stock has gone sideways. But that growth should accelerate as new fiber customers are added. The company’s focus will turn to deleveraging once current investments in the buildout slow. And longer-term, FITH (fiber to the home) is a valuable potential asset in solving the “last mile” problem of the coming 5G rollout.
In 2017, investors have largely ignored the company’s potential – and truthfully, that may persist in 2018. But there’s real value here, and I expect investors to see that … if not next year, then soon.
As of this writing, Vince Martin was long shares of CBB and VRTV.