Who doesn't love hot stocks in hot industries?
Nothing is more exciting for investors, but they may be missing out on overlooked, lucrative turnarounds in down-and-out sectors with delightfully high yields.
This is called a "desert bloom" stock-picking strategy, where you look for the best companies in a lousy industry. They may not get better quickly, but if most of the pain is baked into the price, then value investors will start sniffing around for bargains in a beaten-down industry. If the industry recovers, those stocks have the best chances of bouncing back strongly.
Engineering and mining services company Monadelphous Group Limited (ASX: MND) hit a temporary bottom of around $12 recently, well down from its $28.48 high in February 2013. With iron ore and coal prices at multi-year lows, mining services is still taking it in on the chin. The only bright spot is market talk of commodities nearing cyclical lows.
Until then, Monadelphous Group's 9.4% fully franked yield is eye-popping. Investors will have to check on how stable the stock's dividend payments could be, but a grossed up 13% yield is on offer right now, although there is no certainty over what the level of future dividend payments will be. The company is broadening its oil and gas industry exposure to offset mining, such as getting its biggest ever construction contract on the Ichthys LNG project in Darwin.
At $12.52 a share, it's priced at 8.6 times earnings, at the very bottom of its past PE averages. I can't say when the industry cycle bottom will be, but before then investors will start taking positions. If you don't want a stake in it yet, then at least add it to your watchlist and circle back later.
Super Retail Group Ltd (ASX: SUL) is another example of a regularly strong company stuck in a rut. The retail industry can't get strong traction when consumers don't have a sense of the economy getting better.
However, an October trade update did show progress with its auto and sports retailing businesses such as Supercheap Auto and Rebel Sports. Leisure sales with BCF camping stores still lagged, but overall the outlook appears better. At $7.33 a share, it has a price-earnings ratio of 13 and very healthy 5.4% fully franked yield.
The stock hasn't hit a clear bottom, yet may be close if Christmas season sales expectations hold up. I feel more confident about retail than I do about mining services. Consensus forecasts are pointing to a 9% average annual increase in earnings over the next two years, so it may be time to start a position in Super Retail Group.
