John Dorfman—End-of-Quarter ‘Casualty List’ Provides Some Bargains

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With the end of the second quarter nearing, it’s a good time to look for bargains among stocks that have been banged up since March.

I try to compile a “casualty list” near the end of each quarter. Last year in late June, I recommended eight stocks: American Eagle Outfitters Inc., Fossil Inc., Lubrizol Inc., Rockwell International Corp. Liz Claiborne Inc., Trinity Industries Inc., Lincoln Electric Holdings Inc. and Tommy Hilfiger Corp.

Those eight stocks are up an average of 90 percent from June 22, 2000. By contrast, the Standard & Poor’s 500 Index fell 12.5 percent in the same period.

Though my chances of doing that well again are almost nil, I do see a half-dozen potential bargains among the 44 stocks with a market value of at least $500 million that declined 20 percent or more in the second quarter through June 12.

Owens-Illinois Inc., based in Toledo, Ohio, is the world’s largest manufacturer of glass containers. It is also a major producer of plastic containers and packaging material. As the company fights asbestos liability claims, the stock trades as if the company were headed for bankruptcy.

It’s certainly high risk. Owens-Illinois’ debt was recently four times its stockholders’ equity. The stock, which traded above $48 in mid-1998, fell to a low of less than $3 late last year, and is still trading below $10.

That price works out to just five times recent earnings, 0.2 times revenue and 0.7 times book value. I like the stock for high-risk investors.


Health, flight and tech

PacifiCare Health Systems Inc., based in Santa Ana, is a managed-health-care organization. It runs health maintenance organizations, preferred provider organizations and pharmacy benefit management plans. A big portion of its revenue comes from its Secure Horizons plan, which serves Medicare recipients.

PacifiCare stock has been weak because recent court decisions strengthened the ability of patients to sue their HMOs, and because the company has predicted that its earnings will fall to $1.65 to $1.75 a share this year, from $4.73 last year.

Certainly, the health-care industry is fraught with problems and uncertainties. At five times earnings, 0.3 times book value and .05 times revenue, however, I think the stock is a bargain.

Atlas Air Worldwide Holdings Inc., with headquarters in Purchase, N.Y., is a cargo carrier that works under three-to-five-year contracts with major airlines. It recently furloughed 105 pilots and flight engineers, 12 percent of its workforce, because an expected increase in business this year failed to materialize.

Atlas has been profitable each year since 1993. Though it carries more debt than I prefer at 188 percent of equity, it looks fairly cheap at 8 times earnings, 1.4 times book value and 1.0 times revenue.

Iomega Corp., based in Roy, Utah, makes add-on storage devices for personal computers. One reason the stock has been weak is that computers sold today already have a lot of storage space.

However, a couple of recent hard-disk crashes have improved my opinion of external storage devices. And certainly this stock has become much more reasonable since 1995, when it sold for 1,666 times earnings.

Today, Iomega sells for around 9 times earnings, 1.3 times book value and 0.6 times revenue. At those prices, I think it’s a good buy.


Recreation, telecommunication

Callaway Golf Co. is a stock I own for some of my clients. Based in Carlsbad, Calif., the company makes high-end clubs for the serious player or at least the serious spender.

After trading above $38 in 1997, the stock has fallen to about $15 today. The company has been guiding earnings estimates lower, partly because the U.S. Golf Association banned the Big Bertha ERC II as too lively. The company is debt free, offers a 1.8 percent dividend yield and strikes me as attractive at 10 times earnings.

Tellabs Inc. is the largest stock among the 44 that have been smacked hard this quarter. Based in Lisle, Ill., it makes telecommunications equipment. Sales have grown to $3.38 billion last year, from $869 million in 1996.

Tellabs is suffering as the whole telecom industry is going through the ringer. The company is almost debt-free, so I think it is well equipped to survive.

John Dorfman is a columnist for Bloomberg News.

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