The stock market as a whole, as measured by the S&P 500 index, is flat for the year. That seems like a relatively ho-hum kind of year. But for those who follow the stock market closely, 2015 has been quite an eventful year for many stocks. Amidst the flat overall performance of the broader market were a number of stocks that had a disastrous year.
However, as the saying goes, the time to buy is often when there is blood in the streets. Some of the market’s worst performers this year could turn out to be some of the market’s best performers next year, if their turnarounds prove successful.
With that in mind, here are three underachieving stocks that have suffered greatly this year, but could be interesting turnaround picks in 2016.
Chevron (NYSE: CVX)
Year-to-Date Performance: Down 20%
It comes as no surprise that Chevron was a huge drag on the Dow Jones Industrial Average this year. Its earnings declined by 67% over the first three quarters of the year compared to the same period last year, due to the collapse in commodities.
What Chevron needs for its turnaround to materialize is clearly a recovery in oil and gas prices. There seem to be no real catalysts for that in sight. But oil and gas companies have announced plans to significantly cut back on capital expenditures, including Chevron, which will cut capital spending by 24% next year. And in 2016, investors could see a meaningful supply response from the Organization of the Petroleum Exporting Countries (OPEC), as the oil producing organization may finally feel compelled to reduce its production.
Chevron’s 5% dividend provides a valuable income return. Oil and gas companies are cutting dividends left and right, but for what it’s worth, Chevron’s management has repeatedly reiterated that the dividend remains the company’s top priority.
Qualcomm (NASDAQ: QCOM)
Year-to-Date Performance: Down 37%
Qualcomm investors have dealt with a number of challenges in international markets this year. First, Qualcomm claimed that certain licensees in China were under-reporting device sales to lower their royalty payments, which hurt the company’s sales. And it recently revealed it was hit with antitrust charges by the European Union.
Last fiscal year, Qualcomm’s diluted earnings per share fell 31%. But through its woes, it remained a cash-generating machine. Qualcomm generated $4.5 billion of free cash flow just in the last fiscal year. That represents a 17% free cash flow margin as a percentage of revenue.
And the company holds $30.9 billion of cash and marketable securities on its balance sheet and only $9.9 billion of long-term debt. Its long-term debt-to-equity ratio is a very healthy 31%.
All this cash helps support its hefty 4% dividend. And if it gets past its international woes, Qualcomm can continue to grow its dividend at high rates.
Whole Foods Market (NASDAQ: WFM)
Year-to-Date Performance: Down 34%
Whole Foods’ stock performed very poorly this year, as its comparable-sales growth ground to a halt. The company suffered a bruising pricing scandal in New York City, which eroded its public image.
That being said, working in Whole Foods’ favor is the undeniable health-and-wellness trend. Consumers, particularly in the U.S., are taking a harsher view of processed food and fast food. Instead, they are demanding more fresh food like organics. Whole Foods stands as a major beneficiary of this trend.
Whole Foods’ earnings have flat-lined this year, as the company is spending a significant amount of money to aggressively open new stores. But this is a good move, since the brand remains strong. The more affordable Whole Foods 365 banner could open up a whole new customer demographic to the Whole Foods concept.
In the meantime, Whole Foods generates strong returns and cash flow. The company produced a very healthy 15% return on invested capital last quarter. It recently raised its dividend by 4% and approved a new $1 billion share repurchase program. Along with sales growth, these buybacks could be a nice catalyst for earnings growth next year.
The Bottom Line
These three stocks have struggled mightily this year, for a variety of reasons. In each case, there is no guarantee that underlying business conditions will reverse. Each company is attempting to turn itself around, which is a considerable challenge. But Chevron, Qualcomm and Whole Foods still have strong brands and offer valuable products and services to millions of people.
Each of these three companies remains profitable, pays a dividend, and their valuation multiples are at compressed levels not seen in years. If they can solve their various issues, they may have a good year in store in 2016.
DISCLOSURE: Bob Ciura personally owns shares of Qualcomm (NASDAQ: QCOM).
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