13 Turnaround Stocks for 2014

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icking the losing stocks of 2013 is, quite frankly, not the easiest task. The stock market of 2013 was so bullish that its momentum (a more than 25% return) carried many a company along with it, deserving of the upswing or

not. Conventional wisdom suggests that the stocks that did produce negative returns — like Rio Tinto, Philip Morris, Cirrus Logic, Agnico Eagle Mines and more — did so for a reason, like a deeply flawed business plan or a balance sheet dependent on freefalling gold or silver prices.

Not the case, say investment experts. In fact, the opposite may be true: the market did so well that investors were eager to punish any stock with the slightest hint of negativity, whether or not a slip-up was actually an indicator of something more problematic about the company.

“Most companies, as long as they did what they were supposed to do, they did fine. That’s why I think people are punishing the ones that had specific [and sometimes small] problems,” says Christopher Beck, chief of Delaware Investments small-cap value and mid-cap value equity team. “There were too many others not giving headaches.”

However, just because investors may have been hasty to punish certain stocks this year doesn’t mean they’re doomed to failure forevermore; in fact, some are even poised to redeem themselves in 2014. According to several investment experts interviewed by Forbes, the losers of 2013 included in this special report will rebound in the coming year.

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13 Turnaround StocksFor 2014

By Maggie McGrath


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Rio Tinto (RIO)Sector: Basic materials (industrial metals and minerals)2013 Loss: -13.1%

hy it will rebound: In a word, China. Craig Leighton, lead portfolio manager for the Frost Value Equity Fund, says that Rio Tinto suffered in 2013 from the anticipation of low iron ore prices, but the current price of the stock embeds any future

deterioration. More importantly, Leighton predicts that China, which is a large consumer of iron ore, will only continue its ore consumption as it builds out its infrastructure. “I think Chinese demand means that Rio Tinto’s profit and cash has been substantially underestimated. It has a very strong shareholder return profile as well with the yield above 3%,” Leighton says. “This company, if I’m right, will generate a lot of cash over the next coming years and the stock will look exceedingly cheap.”

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Philip Morris International (PM)Sector: Consumer goods (cigarettes)2013 Loss: -1.6%

hy it will rebound: The tobacco company lagged as its American peers kept up with the market, but Craig Leighton says the company was hit by individual and independent factors—including a price war in Japan, enhanced spending to build up

business in Russia and a sluggishness to embrace the e-cigarette movement—that happened to gang up on them all at once. The key to Philip Morris’ rebound is all of these factors stabilizing, which Leighton thinks is very likely.

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Cirrus Logic (CRUS)Sector: Technology, semi-conductors2013 Loss: -34.7%

hy it will rebound: This stock has an Apple factor: previously tight-lipped about the relationship but confirmed by an SEC filing, Apple accounts for 80% of Cirrus’ sales. When Apple stock tumbled this year, so did Cirrus’, which means that if Apple

reports higher sales in 2014 it will be good news for Cirrus, because Apple will need more of its parts. Delaware Investments’ Chris Beck cautions that this might be a controversial pick for a 2014 turnaround—after all, if Apple sales fall, so might Cirrus sales—but says that there are no financial issues on Cirrus’ balance sheet. He also likes that CRUS is involved in LED lighting, which over time, will ease the financial dependency on its electronics business.

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Agnico Eagle Mines Limited (AEM) and Eldorado Gold (EGO)Sector: Basic materials, gold2013 losses: -50.9% and -57.8%

hy they will rebound: We combined these two companies into one item because Jeff Saut, chief strategist at Raymond James, says that gold stocks suffering from the low price of gold will be among those that benefit from the “January effect,” or tax

loss bounce lift, when investors sell these stocks off to offset capital gains.

WWith respect to Agnico Eagle Mines, Saut pointed to a Raymond James analyst note that called the company one “in-tune with its operations,” which is a good quality to have against gold’s macro environment. As for Eldorado Gold, Saut’s analysts think it will benefit from a strong balance sheet, which

includes $375 million in available credit that can help it weather continued fluctuations in gold prices. Raymond James rates both companies as “outperform.”


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Pan American Silver (PAAS)Sector: Metals2013 Loss: -43.3%

hy it will rebound: Gregory Roeder, co-portfolio manager of the Adirondack Small Cap Fund, says that like gold companies, this silver miner has suffered because of the price of its underlying commodity. However, he remains optimistic about its future

because of silver’s many potential uses. “You’ll find silver in various electronics, smartphones, and content in solar and other applications like that,” he says, adding that there are also uses for silver in health care because it can help burn infections. Not to mention its uses in jewelry, Roeder says, “the future potential of the metal is real.”

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Ensco (ESV)Sector: Basic metals (oil, gas and drilling)2013 Loss: -6.0%

hy it will rebound: Ensco, which produces rigs used in offshore drilling, has suffered from an inflationary market but will benefit from good cash flow and rigs that are younger and more technologically advanced, Frost’s Leighton says. He also likes the

company’s cash flow and the fact that it just raised its dividend by 50%.

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McDermott International (MDR)Sector: Basic materials (oil and gas)2013 Loss: -28.3%

hy it will rebound: Adirondack’s Roeder says McDermott slid because of projection completion problems, but will rebound because it has brought in new management. Roeder believes the new management will “right the ship.”W


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SandRidge Energy (SD)Sector: Basic materials (oil and gas)2013 Loss: -16.7%

hy it will rebound: According to Roeder, it’s another management change situation where the old team wasn’t getting it done, but a new group of leaders could prove to be more effective. That, and also, “it trades at a huge discount to other oil and gas

exploration plays,” Roeder says, a fact that should make it more attractive to investors.

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Edwards Lifesciences (EW)Sector: Health care (medical appliances and equipment)2013 Loss: -33.1%

hy it will rebound: Lamar Villere, co-portfolio manager of the Villere Balanced Fund, says that Edwards is down because management gave too-high guidance, which the company missed. But Villere believes in Edwards’ market position and products,

saying that its trans-catheter aortic valves have a leg up over the competition, allowing patients to repair their hearts without undergoing surgery or taking a large amount of recovery time. “I think there’s value in saving time and money and improving patient outcomes,” he says.

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Newfield Exploration (NFX)Sector: Basic materials (oil and gas)2013 Loss: -13.7%

hy it will rebound: Delaware Investments’ Beck says Newfield has been overspending their cash flow, but are selling offshore assets and he thinks this will help its balance sheet. He predicts it will raise a little more than $1 billion through divesting these

offshore assets.

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Rhino Resource Partners (RNO)Sector: Basic materials (nonmetallic mineral mining)2013 Loss: -23.1%

hy it will rebound: Raymond James’ Saut says Rhino could be another target for the January tax loss bounce, and points to a Raymond James report that predicts the company’s growth capital expenditure (Capex) will start paying off in 2014. The

company should also benefit from its Utica wells, more and more of which will come on line in 2014.

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Stage Stores (SSI)Sector: Services, apparel stores2013 Loss: -15.8%

hy it will rebound: Beck says this smaller, Texas-based retailer missed same store sales estimates, which sent the stock downwards, but there are no fundamental problems with the company. “As long as it doesn’t disappoint in a major way, the

stock would be poised to rebound because it is generating some good cash flow and giving back to shareholders,” he says.

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Performance figures: “2013 Loss” is 2013 year-to-date return through Dec. 12, 2013.

Maggie McGrath covers market news and personal finance for millennials. For more articles from McGrath visit her Forbes blog:

http://www.forbes.com/sites/maggiemcgrath

13 Turnaround Stocks for 2014

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