After writing yesterday's column on potential tax-loss selling candidates, I spent some time thinking about stocks that are down this year and might have strong rebound potential. Rather than sifting through the few hundred stocks that had a negative year in 2013, I decided to quantify things a little bit and see which losing stocks had characteristics that might indicate strong performance in the year ahead.
Two of the most powerful tools in a stock-picker's quiver are insider buying and Piotroski F-scores, so I looked for stocks that are down this year and had recent insider buying and strong F-scores. This produced an interesting, although short, list of stocks that have rebound potential.
Midstates Petroleum (MPO) has had a tough year, as the shares have fallen by almost 17% so far this year. The company is oil and gas exploration company that focuses on what it considers to be underdeveloped fields. Currently, it is active in Mississippian Lime play in northwestern Oklahoma and southern Kansas, the Anadarko Basin in Texas and Oklahoma and the Upper Gulf Coast Tertiary trend onshore in central Louisiana. Production runs heavily in favor of the more profitable oil and natural gas liquids right now, and that is driving sharp revenue gains.
So far, earnings are weak, but the production and revenue increases are expected to result in strong profit growth in 2014. The situation is improving rapidly and is reflected in an F-score of 6. The CEO likes the potential for a recovery in the shares, and he has been a consistent buyer of the stock in the past few months. The stock trades at just 60% of book value right now, so there could be a lot of upside if Wall Street starts to like the earnings growth projected for 2014.
Another name that the screen revealed is Summit Hotel Properties (INN). If you include the dividend, then shares of Summit Hotel Properties squeaked out a positive return over the last year, but the stock price is actually lower than it was a year ago. The company focuses on acquiring and owning premium, select-service hotels in the upscale and upper-midscale segments of the hotel market. Currently, it has 92 hotels that have a total of 11,002 guestrooms in 24 states.
The company has done several common and preferred stock offerings in the past few years and immediately put the cash to work buying properties in what it considers to be solid markets such as Dallas, Denver and Minneapolis. In the past two years, it has spent more than $60 million on upgrading properties to increase its competitive position, and the strategy appears to be working, as the F-score is currently 7. Insiders believe the strategy will pay off, as several, including the CEO, have been buying the stock recently.
Returning to the oil fields, Hercules Offshore (HERO) is another energy-related company that appears to be poised for strong rebound in 2014. Hercules provides shallow-water drilling and marine services to the oil and natural gas exploration-and-production industry around the world. It currently has a fleet of 37 jackup rigs, 13 barge rigs and 58 liftboat vessels, and it also operates five liftboat vessels owned by a third party.
The company has had to deal with a weak drilling market in the U.S., but there are signs that it will improve in 2014. The stock is at a little less than break-even in 2014 and could have a strong 2014. The F-score is 7, and one director recently purchased 100,000 shares of Hercules stock in the open market. The stock trades at 1.1x book value, so if it should decline to a discount to that level, this could become a "too cheap not to own" stock as we approach the new year.
Although these stocks are down in what has been a strong year for the stock market, their corporate condition and stock prices could recover next year. F-scores and insider buying are both predictive of strong stock performance, and these stocks shine on both fronts. Shopping in the bargain bin has been a very successful strategy for me over the years, and I believe that patient, long-term investors who use the tools such as insider buying and F-scores to separate the gold from the trash will be well rewarded.