The year 2016 will go down -- barring a last minute collapse -- as a great one for stocks. Between the constant adulation thrown toward the equity markets in the midst of the Trump Jump and the seemingly endless distractions caused by the rash of celebrity deaths this year, it is easy to forget that not all stocks have participated in the rally.
If one is looking for ideas for 2017, 2016's laggards could be a good place to start. There really isn't much value in a market that has risen 8.4% since the election, a period that has seen FactSet's consensus for 2017 S&P 500 EPS drop by a dollar per share. That's right, despite all the cheerleading on CNBC, the consensus had already been calling for an EPS gain of more than 12% next year, before the election, and has actually been revised downward in the weeks since Trump's victory. I believe analysts will continue to shave those numbers -- as they almost always do -- heading into the new year.
That brings me back to 2016's losers. It's a motley bunch that I have compiled from several "worst of 2016" news articles written in the past week and also from checking websites that deal in things like Dogs of the Dow. One stylistic note: When I refer to Dogs of the Dow, I refer to relative performance, not the stocks with the highest dividend yields. Anyone who believes that high yield makes a stock a "dog" is sadly misinformed and deserves the pain of having been short such high-yielding and high-performing DJIA names as Chevron (CVX) , Caterpillar (CAT) , Verizon (VZ) and Exxon Mobil (XOM) in 2016.
No, dogs are stocks that don't perform, and in 2016's DJIA hierarchy, that's a short list. Disney (DIS) hasn't been great, Coca-Cola (KO) has been a laggard, but really the only true dog in the DJIA this year has been Nike (NKE) . Nike's down 19.6% in the past 52 weeks versus a 13.8% gain for the DJIA. To underperform the market by more than 33 percentage points is astounding. Also, while you may look at your monthly statements and judge the absolute performance of your portfolio, remember that all my friends who are institutional money managers are judged on relative performance to benchmarks, not absolute performance.
So, a stock like Nike becomes radioactive, and the big boys dump it. That's not a permanent thing of course. I believe Action Alerts PLUS holding Apple (AAPL) was in the throes of such an institutional rotation away until May of this year. That's when AAPL shares broke $90, somewhere somebody decided that's just too cheap, and the stock has performed smartly since then.
Nike shares approaching $50 does remind me of Apple shares hitting $90, but what gives me pause as one looking for an entry point is the terrible performance of NKE's main competitor, Under Armour (UAA) . UAA shares are now down a full 40% this year, and that makes one wonder if there's a systematic problem in the athletic apparel and footwear industry.
I went through NKE's financials and earnings releases and I really don't see signs of a company entering a long-term downtrend. NKE's management let inventories build too much ahead of Xmas and they seem to have been slow to address margin pressures caused by factors other than currency. Mark Parker and Co. have not had a great year, and clearly both NKE and UAA missed the fact that Adidas' Stan Smith tennis shoes would become the retro/hipster hit of the year.
But how many times has this happened to NKE? A competitor comes along and we're ready to bury Nike -- I thought the Reebok Pump would lead to NKE's demise when it was introduced in 1989 -- and then they come back strong with new product hits.
I have faith in Nike in the longer-term, but with the broad market so ripe for a turnaround, I am just not in a hurry to buy anything here. So, I'll make the math easy and establish a buy point of $45 for NKE shares. At that level NKE's 72 cent annual dividend payout would yield a respectable 1.6%, and NKE's P/E on 2017 fiscal year consensus EPS of $2.30 would be under 20x.
In tomorrow's column I'll have some other potential buying opportunities among the Dogs of 2016. The performance of some of these smaller stocks, especially in biopharma, makes NKE's 20% decline in 2016 seem like a blip.
