If you're a long-term investor, then chances are that 2019 treated you pretty well. When the curtain closed, the iconic Dow Jones Industrial Average, tech-heavy Nasdaq Composite, and benchmark S&P 500 had risen by 22%, 35%, and 29%, respectively. By comparison, the S&P 500 has historically risen by 7% on an annual basis, inclusive of dividend reinvestment and when adjusted for inflation. In other words, the stock market delivered more than four times its annual average return last year.
But this doesn't mean that every stock participated in the move higher. I've located three companies whose share prices fell by at least 30% in 2019, thereby underperforming the benchmark S&P 500 by roughly 60 (or more) percentage points. The good news is that these contrarian stocks looks to be in play as serious bounce-back candidates in 2020.
Image source: Getty Images.
Teva Pharmaceutical Industries
Though arguable, there may not be a more disliked publicly traded company than brand-name and generic-drug developer Teva Pharmaceutical Industries (TEVA 0.78%). Pretty much everything possible that could go wrong has in recent years. In no particular order, Teva has dealt with:
- A settlement stemming from bribery allegations overseas.
- Top-level executive turnover.
- The complete shelving of its once high-yield dividend.
- Generic-drug price weakness.
- A 44-state lawsuit stemming from its role in the opioid crisis.
- Generic competition impacting sales of its top-selling brand-name drug, Copaxone.
Suffice it to say, things haven't been pretty. But turnaround specialist CEO Kare Schultz has continued to assure shareholders that 2019 was the company's trough year. And if roughly $2 billion in annual free cash flow is the trough, then there could be quite the value proposition to be had here.
Schultz has a history of turning complex businesses around, and he's doing so at Teva by significantly trimming the fat. A combination of layoffs and non-core asset sales should reduce the company's annual expenses by $3 billion as of this year, which is about a 16% reduction from its full-year operating expenses prior to his hiring. This has been coupled with a reduction in its net debt of $8 billion in a little over two years. Yes, Teva is still lugging around $27.5 billion in total debt, but things aren't nearly as bad as some folks on Wall Street would lead you to believe.
With Teva appearing to have resolved a significant portion of its opioid lawsuits late last year, the company can now focus on its core generic-drug business. Though we began to see signs of pricing improvements among generics late last year, this story is really about Teva being at the center of an aging population that's expected to become more dependent on pharmaceuticals as time passes. At less than four times next year's earnings per share, it's my view that all the negativity, and some, has been priced into this stock. Teva looks to be a solid candidate to rebound in 2020.
Image source: Lovesac.
Lovesac
Despite having "love" in the name, shareholders showed nothing but contempt in the second half of 2019 for home furnishings company Lovesac (LOVE 2.16%). By year's end, Lovesac had declined by 30%.
Arguably the biggest concern for Lovesac is the company's ties to China. It had been importing a significant amount of product from the low-labor-cost country, which became a problem when the trade spat between the U.S. and China intensified last year. Tariffs levied on some of its core products meant higher expenses, as well as the need to pass along higher prices to its customers. In short, investors weren't thrilled with Lovesac's second-half quarterly losses.
The positive news here is that Lovesac has made significant headway on its sourcing. The company has been steadily sourcing more product from Vietnam instead of China, which should lead to more predictable costs this year.
Further, consumers haven't pushed back against higher price points and have been demonstrating strong attachment purchases for product sets. In fact, Lovesac has seen online and brick-and-mortar sales growth continue to grow by high double-digits, with Wall Street counting on 40% full-year sales growth in 2020. This follows management's forecast of 40% to 42% net sales growth in 2019.
While it's true that Lovesac isn't expected to be profitable in 2020, the company does believe it generated positive adjusted EBITDA in 2019. With this trend potentially continuing in 2020, and the company valued at well under 1 times sales, it looks to be an intriguing contrarian buy.
Image source: Getty Images.
OrganiGram Holdings
Lastly, you almost knew there would be a marijuana stock on this list after the shellacking the entire industry took in 2019. Of the multiple cannabis stocks to choose from, Canadian grower OrganiGram Holdings (OGI 0.80%) looks likely to have better days ahead of it.
The Canadian pot industry has been contending with supply issues since adult-use sales commenced on Oct. 17, 2018. Part of the problem relates to Health Canada struggling to approve cultivation and sales licenses in a timely manner, as well as delaying the launch of derivatives until mid-December 2019. But the bigger issue has been Ontario's lack of a retail presence. At the one-year anniversary of recreational weed sales, Ontario had only 24 dispensaries open, which is good enough for one store per 604,000 people.
Although these supply issues remain a work-in-progress for Canadian pot stocks, OrganiGram has competitive advantages that put it in position to outperform its competitors. To begin with, it's one of five growers that has supply deals with all of Canada's provinces. It's also the only major grower located in eastern Canada (New Brunswick), placing it near a number of provinces where adult-use rates are higher than the national average.
OrganiGram's Moncton campus also offers a bevy of advantages. The company's lone grow site should be among the most efficient in the industry, in terms of yield per square foot, which is expected to lead to below-average per-gram production costs. Plus, having all of its output come from a single site means less in the way of supply chain expenses, and should make OrganiGram nimbler when it comes to adjusting its production or costs to meet market conditions.
Let's not forget that OrganiGram is the only Canadian grower to have produced a no-nonsense quarterly operating profit to date. While I'd expect the pot industry to remain volatile in 2020, OrganiGram has all the necessary tools to be a solid bounce-back candidate.
