High on the New Lows

 | Oct 11, 2011 | 2:00 PM EDT  | Comments
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The market rallied almost 10% in October off earlier lows. News from Europe and the U.S. has been dominant, and the rallies seem to be based mostly on hope. Large-cap oil and bank stocks have caught strong bids in the past week as traders have searched for ways to play developing news and trends. Stocks such as Exxon Mobil (XOM), Wells Fargo (WFC) and JPMorgan Chase (JPM) are flirting with 52-week highs. Momentum names Amazon (AMZN) and Green Mountain Coffee (GMCR) have begun to surge again as money flows back into the stock market.

When we get these short, quick reversals, I like to consider the companies that aren't benefitting from the rush to buy. I always pay a lot of attention to the list of new lows in my search for ideas, but when we get a sharp rally like the past week or so, I pay even closer attention. It's not just the ideas I might uncover; I find that this list contains valuable information about the market and the economy as a whole.

With that in mind, I took a closer look at stocks that hit 52-week lows in the past few days.

I see that many small banks are hitting new lows for the year. The big banks have become trading vehicles to express an opinion on the likelihood of a fix in Europe or improving economic statistics in the U.S. Many of the small banks show what I believe to be a better picture of what is happening on Main Street. Loan losses are still a problem, and creditworthy borrowers are hard to find for many of these institutions. Economic activity has not risen to a pace that justifies making loans using the uncertain collateral of commercial or residential real estate in many parts of the country. The Fed's Operation Twist is going to pressure interest rate spreads and could pressure profits for many of these banks.

I also see a lot of real estate-related names on the list. Mortgage real estate investment trusts have been hit hard lately, as they will likely see earnings, and possibly dividend payouts, compressed by the recent Fed announcements. Smaller equity REITs without lots of cash on hand or favorable access to capital markets are also seeing their stock prices tumble. Office buildings and other commercial properties are seeing occupancy rates, as well as rents, continue to decline outside of major urban areas. This is taking a toll on the smaller operators that cannot afford to move up the more favorable markets in the current environment and are seeing profits and their stock prices decline.

There are many restaurant stocks on the list as well. The weakness in the sector has pulled down the price of a company that I have always liked, Sysco (SYY), the leading distributor of food and related products to the restaurant industry. The company went public in 1970 and has become so dominant that it is almost impossible to be in the restaurant industry and not do business with Sysco.

The stock is not cheap on my preferred measure of price to tangible book value, but the price-to-earnings ratio and price to sales are close to where they were in 2008. At the current price the stock yields 4%, so investors get paid while waiting for the economy and restaurant business to improve. This stock is a good fit for conservative, long-term growth and income investors. I can't predict when the economy will recover, but I remain highly confident that it will at some point. When it does, Sysco will resume a strong growth trajectory as people begin to dine out more frequently.

Searching the new-low lists can reveal valuable information, as well as ideas, worth considering for long-term and somewhat contrarian investors.

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