Here we are going into yet another earnings season.  We saw Monday how the market has rallied significantly from the March lows and the major indexes are even up in positive territory for the 2009 calendar.  The DJIA is up 51% from its absolute lows of March, and the S&P 500 has rallied more than 61% from its absolute lows in March.  If you look at the December 31, 2008 closing bell levels, the DJIA is now up about 12.75% and the S&P 500 is now up more than 19% year-to-date.

But almost as always, there are still some key very large and/or very active stocks which have not recovered anywhere close to the same amounts with the overall stock markets.  Some of these lagging stocks are Abbott Laboratories (NYSE: ABT), Altria Group Inc. (NYSE: MO), American Water Works Company, Inc. (NYSE: AWK), Burger King Holdings Inc. (NYSE: BKC), Energy Conversion Devices, Inc. (NASDAQ: ENER), Genzyme Corp. (NASDAQ: GENZ), Kroger Co. (NYSE: KR), Orbital Sciences Corp. (NYSE: ORB) and Wal-Mart Stores Inc. (NYSE: WMT).  Two similar situation stocks that are Leap Wireless International Inc. (NASDAQ: LEAP) and MetroPCS Communications Inc. (NYSE: PCS).  We wanted to explore the forward values and relative performance, and the consensus estimates based upon Thomson Reuters data.  Only two of these stocks have market capitalization rates under $1 billion, and almost all are very actively traded and well known in their sectors.

Abbott Laboratories (NYSE: ABT) is on deck to report earnings this week and it was surprising how far it has lagged to some of the large peers.  The good news is that it has started to participate in the rally with a 10% gain over the last month.  Saying it has ‘only’ recovered by 21% from its April-May lows shows how well the market sentiment is and how well other stocks have performed.  But shares are only about 10% higher from the early March inflection point lows.  Abbott trades at about 12.2-times normalized 2010 earnings estimates of $4.12 and the stock carries a 3.2% dividend yield.  Guidance was spotty before and obviously the sector has political risks into 2010 and beyond because it is tied to healthcare.

Altria Group Inc. (NYSE: MO) might not be a shock that it has lagged if you believe that smoking is a dead industry in the future.  But the one recognition that has always been the case is that Big Tobacco has always survived.  Things are even good enough that it recently juiced up its dividend and appears to have enough earnings power for plenty of dividend coverage for the future.  It is hard to bash a stock that has risen 28% from the March lows, but this greatly lags the performance of Philip Morris International, Inc. (NYSE: PM), Reynolds American Inc. (NYSE: RAI) and Lorillard, Inc. (NYSE: LO).  The Big-Mo trades at just under 10-times a normalized estimate of $1.85 EPS for 2010 and its dividend yield is almost 7.5% now that it has been hiked.  This only needs to rally about 14% to hit 52-week highs, so this is just representative more of nearly-dead money rather than anything that looks or feels sinister.

American Water Works Company, Inc. (NYSE: AWK) is in that long-discussed great sector of water, but as a utility.  It may just be more shares sold and the risks of more shares being sold, but this one has effectively been dead money ever since it came public (again).  At almost $20.00, shares are up about 23% from the absolute lows. That looks to be well under all of its larger peers here in the U.S.  This stock and sector does have a premium considering the utility status, but analysts are looking for growth from 2009 to 2010.  This one trades at less than 14-times normalized earnings estimates of $1.46 EPS for 2010.  America’s largest water utility did hike its dividend for August and it now yields about 4.2%.

Burger King Holdings Inc. (NYSE: BKC) is supposed to be in a class of eating-out that wins in recessions via fast food and very casual dining.  It seems like that crazy looking king character in commercials that scared so many kids has also scared investors.  This company has only recovered some 13% from its recent 52-week lows despite only trading at about 12.2-times its Fiscal-2010 (June) earnings estimates.  Its market cap is just under $2.4 billion.  The much larger, and far better-run, McDonald’s Corp. (NYSE: MCD) has not exactly been a performing beast this year, but its shares are up 25% from lows.  The Big Whopper would also have to rally almost 50% before hitting 52-week highs.  Unfortunately, its dividend yield is only about 1.4%.  For this to start performing again, management is going to have to do a better turnaround plan than what it has managed so far.

Energy Conversion Devices, Inc. (NASDAQ: ENER) is one where the figures are actually a tad better than what is reflected because of the solid gains seen on Monday.  Before Monday, this one was not even 10% above its 52-week lows and shares are still under the inflection point lows in the market during March.  Despite this being one of the old top solar stocks for traders, it has failed miserably to bounce when you consider the bounce of the major solar players.  First Solar, Inc. (NASDAQ: FSLR) is up over 75% and Suntech Power Holdings Co. Ltd. (NYSE: STP) is up almost 200% from its absolute lows over the last year.  Unfortunately this is expected to post a loss for all of its Fiscal 2010 (June) and estimates are $0.28 for its following Fiscal 2011 (June).  There is no dividend and this is likely to trade around how well oil prices do and on its own guidance and not its trading based on how the market does.  This is down from a 52-week high north of $48 and down from a peak of $80 back in the Summer-2008 highs.  No dividends are to be found here.

Genzyme Corp. (NASDAQ: GENZ) did recover from lows in August.  This troubled biotech giant is up about 20% from the absolute lows in August and ‘only’ up about 16% from its lowest close of $48.19 in August.  The reason here is simple.  Serious manufacturing issues resulted in contamination issues, and the company is effectively under a red flag warning by the FDA.  But this also trades at a much deeper discount than most of the large biotech stocks.  It would take close to a 50% rally for this to challenge its old 2008 highs.  The question that exists here is not over whether it still has an addressable market, but whether it can get its house entirely back in order before competition comes on in 2010.  Like most biotech companies, it has no dividend.  Earnings estimates are now all over the place, but it trades at roughly 14-times normalized 2010 earnings.  Even if you take a median estimate over an average estimate for 2010, that forward multiple is only around 15-times 2010 earnings.  Of course there are still risks here, but that is why the stock is already down so much on its woes.

Kroger Co. (NYSE: KR) was also up on Monday as an analyst upgraded the stock on valuation.  But the stock is still a laggard compared to rival Safeway (NYSE: SWY).  The company’s latest earnings report kept it from rallying because it was still experiencing difficult pricing and that has kept its shares from rallying.  We have barely seen a 15% gain since March’s lows.  Its 2010 ends in January 2011, but it trades at 10.4-times the $2.14 estimate.  This is representative of a mature grocery sector and the discount to Safeway is small but still there:  Safeway is up 24% from its lows and trades at 11-times the comparable forward earnings.  Analysts are still looking for growth and this would have to rally over 30% before its 52-week highs came back into play.

Orbital Sciences Corp. (NYSE: ORB) may seem the riskiest of all these underperforming stocks as its main operations are in small space and rocket systems, as well as GEO satellites for communications and broadcasting and LEO spacecraft that perform remote sensing and scientific research.  But effectively, the company is a pure-play on space operation and exploration, including deep space.  This stock is still down about one-third from a year ago and is ‘only’ up 22% from its lows in March.  Earnings estimates have come down over the last quarter but there has not been a significant downgrade worth noting from analysts of late.  With the government purse being tight and with the Obama administration reportedly considering privatizing much space exploration, a wild card exists here.  Loral Space & Communications (NASDAQ: LORL) is considered its top comparable stock, and that one has risen exponentially from its lows.

Wal-Mart Stores Inc. (NYSE: WMT) is supposed to be the winner in the recession, right?  Yet don’t go looking for it to be the golden child of stock performance.  And its 2.2% dividend yield might not sound like much.  Wal-Mart is under $50.00, and is only about 8% above its 52-week lows.  It would also take ‘only’ a 20% gain for Wal-Mart to challenge its 52-week highs.  And year-to-date the stock is down 10%.  It seems that its policy of dropping guidance and its same store sales reporting has not been as rewarding as it would hope.  Now the valuation question for the world’s largest retailer.  This trades at about 13.7-times a normalized 2010 earnings (actually Jan. 2011) estimate of $3.92.  Wal-Mart is still growing.  It would also seem as though that as long as there is an army of unemployed and as long as the notion of thrift is semi-secular, then this is lagging and cheap. Target Corp. (NYSE: TGT) trades at about 14.5-times 2010 comparable estimates, but Target has also almost doubled from its absolute lows.  Costco Wholesale Corporation (NASDAQ: COST) has rallied 50% from its lows, despite a much higher forward multiple.

Leap Wireless International Inc. (NASDAQ: LEAP) and MetroPCS Communications Inc. (NYSE: PCS) are two very similar companies that have been gross disappointments.  Despite the overall wireless sector being a tough space and despite fairly low performance even from the leaders, these two have been an outright disappointment by every single measurement besides being great performers for short sellers.  As there once was a merger on the table (which was blocked) and as these are both in the no-contract or pre-paid wireless sector, we are only going to mention the performance metrics.

• Leap Wireless is down close to 40% year to date.  The stock is up about 15% from its 52-week low.
• MetroPCS is down over 45% year to date.  The stock is also not even 10% off of its 52-week lows.

Leap is now expected to lose money in 2010, and if the $0.69 estimate is right on MetroPCS then it trades at about 12-times 2010 estimates.  Unfortunately, that is 20-times a 2009 estimate for MetroPCS.  We won’t go as far as to predict a merger here, but a proposed merger this time around could be out of need and not out of greed.

Again, the estimates are based on Thomson Reuters estimates and share performance is based from the weekend when a static snapshot existed equally among all.  Many of these estimates will change throughout this earnings season.  Despite the rally, there are still some very large or very active stocks which have just not participated.

JON C. OGG
OCTOBER 12, 2009

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