It was early in October before earnings season kicked off into full thrust when we first reviewed many large or actively traded stocks which had not participated in the stock market rally of 2009.  At the time, the DJIA was up 12.75% for the year, and the S&P 500 Index was up more than 19%; as of Friday’s post-jobs data close the DJIA is up over 18% and the S&P is up 22%.  To add an even more extreme measure since the March 9 close that traders use as the official pivot close before the great bull market of 2009 started, the gain the the DJIA is up over 58% and the S&P 500 is up over 63%.  Yet it is amazing.  Some of these stocks that have been left behind n the rally have still been left behind.

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) were all the underperformers of the time.

We have broken these into two groups with the first being the ones that have managed to spark a recovery and rallied more than the markets.  Since the cut-off date of October 9 used for these prices, the DJIA is up 5.3% and the S&P is up 3.2%.  The first group is the winners and we won’t spend much time there other than how they have performed since the October 9 cut-off date:

Abbott Laboratories (NYSE: ABT) has actually outperformed the market since October 9 with gains of 8.2%, but this still is lagging some key peers in performance.  This is on top of what was a 10% rally in the month before our October cut-off.  Because estimates were raised by analysts, Abbott now trades at only 10.6-times 2010 earnings.  This has still been a success, because guess which stock hit a 52-week intra-day high on Friday at $37.50.

Altria Group Inc. (NYSE: MO) participated in the gains as well.  Shares are up 6.9% since  October 9 and is now up over 35% from the March lows. The Big-Mo is actually still cheap at 10.3-times 2010 earnings and its dividend yield is about 7%.  The Big-Mo is now only 1% under a 52-week high, but still lags if you go back about 15 months.

American Water Works Company, Inc. (NYSE: AWK) has recovered by over 11% since October 9, one of the better performers.  Despite being dead money since its IPO, the largest US water utility is only about 3% shy of 52-week highs and still yields 3.9%.  It also seems as though it needs much gain in earnings power to justify a considerable run further from here as it trades at over 15-times 2010 earnings estimates. Still, not bad at all… particularly as RWE unloaded more shares since the past reference.

Wal-Mart Stores Inc. (NYSE: WMT) had been just sitting quiet despite being the go-to retail winner and champion of America during the recession.  On October 9, its shares were at $49.97, but they now have rallied 8.5% to $54.24. The stock would have to run close 10% more before a 52-week high alert would go off like we saw with other major retailers in November.  The stock is technically still ‘left behind by the rally’ because it is still down 1.6% for all of 2009.  It is hard to call this an overall market catcher-upper, but it has risen by a better rate than the DJIA and the S&P 500 since the October 9 period.  Analysts have an average target of roughly $60.00 on the stock and its 13.7-times Fiscal Jan-2011 earnings estimates is actually still mid-range compared to competitor valuations today (18.4-times for Costco and 12.8-times for Target).

There is still the lot of underperformers or those which have lackluster returns.  It seems that the stocks that the rally left behind may still have value investing rewards ahead.  But there are some with added risks as well.  We wanted to re-review forward valuations based on Thomson Reuters consensus, relative performance to the market and peers, and what each prospects seem to be for the coming months or out into 2010.

Burger King Holdings Inc. (NYSE: BKC) is probably not that exciting with a 4.6% gain since October 9 with shares now at $18.27.  It is still a gain, but lackluster even if compared to market averages.  The stock is still down 40% from post-IPO highs and is technically back close to its IPO price.  This fast-food chain is supposed to be among the winners, yet that crazy looking king character in commercials isn’t luring in investors.  Burger King would have to run over 50% before it makes many of the post-IPO investors whole again.  The good news is that it trades at only 11.5-times 2010 estimates and its 1.4% dividend yield has a lot of room to be raised.  Problems aside, this still has much room to go if it can get back to earnings upside and if it decides to get more shareholder friendly.

Energy Conversion Devices, Inc. (NASDAQ: ENER) is down another 6% from the October 9 cut-off, yet the stock immediately ran up over 20% after we covered it the first time.  It seems that the woes here are not going away nor are they getting better. Analysts now expect Fiscal 2010 (June) AND Fiscal 2011 to have losses, much worse than before.  We think the only issue that may help the company is if oil prices suddenly rocket or if any of those buyout rumors can resurface.  This is down by about two-thirds from a 52-week high with shares now at $10.17, but this was an $80 stock at the peak of the solar bubble.  Yes, it was a bubble.  And internal opportunities seem few.

Genzyme Corp. (NASDAQ: GENZ) has remained a serial disappointment as shares are only about 6% off the 52-week lows and at $49.98.  While the stock has recovered, it rolled back over and is now down over 10% from October 9.  Serious manufacturing and contamination issues are not what a biotech drug companies wants to be trying to correct, and now there IS more likely competition.  The stock still trades at a deep discount to large biotech stocks and it would now take more than 50% gains before it reached its 2008 highs. Earnings estimates have continued to be brought down, and the stock now trades at under 14-times normalized 2010 earnings.  There are continued risks here, and we’d probably wait to see if one more shoe drops.  It is cheap, for a reason.

Kroger Co. (NYSE: KR) had just recovered almost 10% before that October 9 cut-off and shares did go another 10% up before coming back down.  Shares were at $22.22 at the time and are still $22.50 as of Friday. That is a 1% gain compared to a gain in Safeway (NYSE: SWY) of over 4%; and Kroger is still up only about 16% since March’s lows.  The stock trades at 10.6 times Fiscal Jan-2011 earnings estimates and it would still have to rally over 30% before its 52-week highs came back into play.  The rally left it behind, but it seems investors do not care one way or the other.  The stock is cheap for value investors and probably has very limited downside based on all of the available data, but there is just no excitement to be found here.

Orbital Sciences Corp. (NYSE: ORB) is one of the key stocks for investors who want to invest in the development of outer space.  Yet something isn’t working here.  On October 9, this was at $14.73, yet shares are down over 11% since then at $13.05.  This stock is also 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.  Orbital is now only up 7.7% from the March lows and it would have to run 50% to hit 52-week highs and could still double before hitting highs of 2008.  Earnings estimates have come down substantially, on what appears to be based upon guidance from its last earnings.  Loral Space & Communications (NASDAQ: LORL) is a comparable stock, and it is up both exponentially from recent lows and almost at 52-week highs.

Leap Wireless International Inc. (NASDAQ: LEAP) and MetroPCS Communications Inc. (NYSE: PCS) are thought of in almost the same light by the investment community.  The market has not favored telecom stocks, and both are in the prepaid or no-contract segment of the economy.  Based upon how many people have made poor and/or cash- strapped over the last 24 months, both companies should have a mountain of subscribers to fight over.  Yet there is now major carrier competition and they are probably dwindling each other in some markets.  Leap’s shares were at $16.15 on October 9, and they are down over 5% at $15.28 now.  MetroPCS is even worse as shares were at $8.07 on October 9 and are now at $6.60 for an added 18% loss.  There was a merger attempt here once which failed, and it seems that price might need to get a gut-check.  A stock-for-stock deal would keep holders from being forced into a loss position if the merger were all-cash.  This may be a time of need rather than a time of choice for these two.

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JON C. OGG
December 7, 2009

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