Investing is a tricky pursuit. Not only as an investor do you have to accurately predict the long-term prospects of a firm but you also have to determine the value that those prospects are worth. This is complicated further by a stock market which may not always be sending a clear message to investors about the true prospects or value of a company. As Benjamin Graham once said – In the short term the market behaves like a voting machine but in the long run it acts like a weighing machine.
In 2013 a number of businesses were downgraded by investors who took the collective view that the prospects of each particular firm had diminished. While the market collectively gets many things right, thankfully for Foolish investors it also gets things wrong, which offers the opportunity for alert Fools to profit.
Here are three stocks which have underperformed the market in 2013, but may not have outlooks as bleak as the market appears to be pricing in.
Echo Entertainment Group Ltd (ASX: EGP) has recorded a fall in its share price of around 29%, thanks (or rather no thanks!) to the James Packer-led Crown Resorts Ltd (ASX: CWN), which has managed to gain a foothold in the Sydney market – until now a monopoly position held by Echo. In contrast, the ambitious expansion plans of Crown – which aren't just limited to New South Wales – spurred a near 60% rally in its share price.
There's no doubt that Crown's entry into NSW is a blow for Echo, however it will continue to enjoy a significant share of the state's casino revenue as well as offering shareholders exposure to Queensland. Arguably the current share price more than reflects the future earnings pressure from the loss of one or more monopoly positions.
In December Wotif.com Holdings Limited (ASX: WTF) issued a profit downgrade which surprised the market and sent shockwaves through its share price. Having previously been viewed as a high-growth stock, the market's view that the company is now 'ex-growth' has resulted in a share price decline of approximately 50%.
It has long been a concern that large foreign competitors in the online travel booking sector could enter the domestic market and cause headaches for previous high-flyers such as Wotif. With data suggesting these competitors are starting to make inroads into the Australian market it could be a painful period ahead for Wotif.
Seven Group Holdings Ltd (ASX: SVW) actually had a pretty good 2013 all things considered. While many of its mining services peers recorded significant share price falls, Seven managed to limit its decline to just 5%. Of course that was still a poor performance relative to the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO), which recorded a near 15% return.
While a decline in domestic heavy equipment sales due to the weaker outlook for the resource sector will affect Seven, quick action to boost its exposure to Caterpillar equipment sales in China, its significant maintenance operations, and the potential for a rebound in earnings at Seven West Media Ltd (ASX: SWM) could all be reasons to keep an eye on this stock as a potential rebound candidate in 2014.
Foolish takeaway
Not all investors are comfortable adding stocks with cloudy outlooks to their portfolio, particularly if they want to draw a steady income from their portfolio, understandably solid dividend paying businesses are more likely to fit the bill.
