Value Stocks Take the Lead

 | Feb 17, 2012 | 1:00 PM EST
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January and February have been a training ground for stocks, with earnings reports flooding in and giving us an idea of which companies might be able to thrive as well as which companies might be able to execute a lasting turnaround from last year's close. Economically last year was better than 2010, which in turn was better than 2009. It is anticipated that this year will be better than the last and the economy will continue to recover and give some companies a chance to resume an upward trajectory.

Earnings season has been lumpy at best, with many leading companies reporting an OK quarter but dampening expectations for the rest of the year. The market has been on a tear since early December, and it was one of the best Januaries in stock market history. Many of our value stocks have gone from unloved to market leaders, as they began to show signs of recovery, leading to positive investor attention.

Kite Realty Group (KRG) is a perfect example of what has been happening over the past few months with formerly unloved value and distressed stocks. The stock traded down for much of the last year, but business is starting to improve for the shopping center owner and operator. Revenue grew in 2011 as did rents per square foot for its property portfolio. Management has been successful in restructuring and refinancing the balance sheet to better position the company for growth when the economy does enter full recovery mode. As the business is improving, so is the share price. For the last three months, shares of Kite Realty are up 31%, and they have surged by more than 20% since the first of the year.

VOXX International (VOXX) is another value company that stuck with a strategy during the economic downturn that has now paid off for investors. For several years, this was a sleepy little consumer electronics company that usually showed up on lists of stocks trading below net current assets or even below net cash balances. As the economy weakened, management finally spent the cash to buy Klipsch, allowing VOXX to increase its brand portfolio and international exposure. It worked, to say the least. Sales and profits have surged forward and so has the stock price. Shares are up over 100% on the last quarter and more than 70% so far this year. Buying shares of the consumer electronics company as the recession began and scaling in on weakness has been a home run for patient disciplined value investors.

LeapFrog (LF) went from one of my biggest losers in 2011 to a solid winner so far in 2012, as the holiday season for its educational toys was stronger than analysts expected. The stock is up more than 50% in the last three months and is up more than 35% so far this year after earnings exceeded analysts' expectations and investors piled into the stock. At one point, I had a loss of more than 30% on my average cost, but this quicker-than-expected recovery in the business has allowed the stock to double off the lows, and I now have a 30% gain in the shares.

Buying at the point of maximum pessimism in Europe last year has paid off in a very big way. As late as the last trading day of 2011, I was buying shares of European and Japanese banks, as the pessimism was overwhelming and they were incredibly cheap. I started tip-toeing into these troubled waters early in the year, and, consistent with my stay small, move slow approach, the market's extreme volatility gave me several chances to scale into the stocks. It has more than paid off.

Royal Bank of Scotland (RBS) has seen its stock price rise by more than 35% so far this year. Mitsubishi UFJ (MTU), one of my two Japanese stock picks is up more than 22%, while Mizuho Financial (MFG) has risen by more than 21%. I was very late buying Bank of Ireland (IRE), and the stock has rewarded my procrastination by rising a stunning 65% in the first seven weeks of the year. As long as central banks are flooding the world with liquidity, these shares should continue a bumpy path toward tangible book value.

Most of these stocks traded down or (at best) sideways during the time I have owned them. It has been necessary to have the courage of one's convictions to hold and even add to these positions during times of market volatility. The returns from value investing are usually very lumpy, and you have to do the homework to hold during the slow times to reap the benefits of the extraordinary times.

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