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The Worst Value Stocks of 2015

By Sean Williams - Jan 2, 2016 at 7:07PM

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The broader market may have finished 2015 relatively flat, but these three value stocks plunged by 70% or more.

Image source: Flickr user David Goehring.

After more than six years in a bull market, investors were certainly hoping for a bit more from the broad-market S&P 500 than a flat finish in 2015 -- but that's what they wound up getting.

There were definite high notes in 2015 despite the indecisive movements in the broader market. The U.S. GDP remains on track to grow on a year-over-year basis, the unemployment rate is back within its desired and sustainable range of 4% to 6%, and merger and acquisition deal value hit a record in 2015, implying that businesses have good long-term visibility and are willing to take on risk. All of these factors bode well for a potential rally in 2016.

Of course, there was an unpleasant side to 2015 as well. The prices of many commodities -- namely, oil, natural gas, and copper -- tanked. The U.S. dollar continued to gather steam, weighing on the sales and profits of U.S. multinational companies that report in dollars, and terrorism unfortunately reared its head on more than one occasion.

The worst value stocks of 2015
Although the market whipsawed to a relatively flat finish in 2015, some value stocks really took it on the chin.

What exactly is a value stock? Although there is no concrete definition, I define a value stock as a company with a price/earnings-to-growth (PEG) ratio of about one or less. While P/E ratios take into account valuation as a function of price and profits, the PEG ratio does a better job of quantifying "value" by taking into account a company's growth prospects over a specified time period as well. This does mean that high-growth stocks can also be value stocks, but they would need to be profitable to qualify (and also remain profitable in 2016).

Let's take a brief look at the worst-performing value stocks of 2015.

Image source: Seadrill Partners.

Seadrill Partners (SDLP): down 74%
Surprise (or maybe not)! The worst-performing value stock of 2015 hails from the energy sector.

Seadrill Partners owns interests in a handful of offshore drilling rigs, and it's been creamed by the perpetual downward movement in oil prices over the past year and a half. Oil, which had regularly been trading between $80 and $110 per barrel, is now stuck well below $40, and offshore drillers are really feeling the pain, as offshore drilling can often be more expensive than land-based recovery. If there's one bright spot, Seadrill Partners' order backlog of $4.7 billion gives it a nearly three-year revenue runway. But the good news stops there.

In December, Seadrill Partners announced a 56% reduction in its quarterly dividend, reducing its payout to $0.25 per quarter from $0.5675. To be clear, with its stock trading for around $3.50 per share, this still equates to a massive dividend yield in excess of 25%. However, it's also a clear indication that the company's cash flow and liquidity could be challenged going forward.

If that were not enough, Seadrill (SDRL), Seadrill Partners' parent company, is having problems of its own. In its most recently reported quarter, Seadrill's backlog dropped by $2 billion to $12 billion. Even more concerning is Seadrill's $12 billion in debt. Although Seadrill has one of the youngest and most efficient offshore fleets in the Gulf of Mexico, it means nothing if there's no demand.

It's possible oil supply and demand could achieve equilibrium in 2016, which would bode well for both Seadrill Partners and its parent. But at the moment, this value stock looks like a no-go -- even with a 28% yield and a forward P/E of just one -- until its long-term outlook improves.

Image source: GoPro. 

GoPro (GPRO -1.60%): down 71%
Photography and entertainment giant GoPro was nothing short of unstoppable following its June 2014 IPO. Shares rose by 135% in 2014 from where they closed on day one (and that was after the stock traded well above its offering price). But 2015 has been a different story, with its shares dipping by more than 70%.

What's been wrong with GoPro? Aside from valuation concerns and high short interest early in the year, the primary culprit appears to be the cool reception of its HERO4 Session devices, which were initially overpriced and recently relaunched. Wall Street understands full well that photography and video devices rarely boast substantial margins (generally speaking), thus there was concern, based on the weak demand for the HERO4 Session devices, that GoPro's popularity could be cooling.

The good news? I believe GoPro, unlike Seadrill Partners, could have a much better 2016. The company boasted five of the top 10 best-selling products in the camcorder and digital camera category in the third quarter, and it's taking steps to move into other areas beyond selling devices.

What might the future hold for GoPro? In theory, GoPro could monetize the content created using its devices. This could include selling streaming movie subscriptions to user-generated content or planting ads around photos and videos. GoPro already has one of the most popular YouTube channels, so the idea isn't too far-fetched.

GoPro is what you'd call the perfect blend of a growth and value stock. With its full-year EPS expected to cross $2 by 2018 or 2019, and its PEG ratio nicely below one, this is a beaten-down name worth considering for 2016.

SunCoke Energy Partners (SXCP): down 70%
Rounding out the worst value stocks of 2015 is master limited partnership SunCoke Energy Partners. SunCoke Energy Partners is a producer of coke used in the blast furnace production of steel, and it also handles the blending of metallurgical and thermal coal.

It's not difficult to surmise why SunCoke has been beaten up in 2015: commodity weakness. Consistent coal oversupply that has led to depressed prices, as well as tumbling steel prices in China stemming from a slowdown in its economy, has been a primary cause for concern. With no clear recovery on the horizon for China, and nearly $880 million in net debt on SunCoke Energy Partners' balance sheet, investors aren't expecting things to improve anytime soon.

If there is good news, SunCoke Energy Partners announced during its Investor Day in mid-December that it planned to maintain its current quarterly cash dividend of $0.594 per unit and that it would be focused on reducing debt in 2016. In fact, its sponsoring company, SunCoke Energy (SXC -2.15%), announced that its board of directors had voted to suspend the dividend in order to allow for an improved capital allocation that would ultimately delever SunCoke Energy Partners in 2016. Furthermore, SunCoke Energy Partners boosted its prior EBITDA guidance for 2016 following the addition of a couple of acquisitions. 

So what should you trust: SunCoke Energy Partners' lofty 2016 goals and its ridiculous 34% dividend, or the economic fundamentals behind the steel and coal markets? For investors with a high tolerance for risk and reward, I'd suggest that a small nibble of SunCoke Energy Partners might be worthwhile. I'm typically no advocate of chasing yield, but there's the expectation of 1.41 to 1.54 distributable cash flow coverage in 2016, as well as raised full-year EBITDA expectations. There are also valid concerns that the steel and coal markets could weaken further, ultimately leading to a dividend cut or suspension. Still, the healthy cash coverage and proactive response by SunCoke Energy to help lower its MLP's debt levels suggests this could be worth a small investment.

Sean Williams owns shares of Seadrill, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of and recommends GoPro. It also recommends Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Seadrill Partners LLC Stock Quote
Seadrill Partners LLC
SunCoke Energy Partners, L.P. Stock Quote
SunCoke Energy Partners, L.P.
GoPro, Inc. Stock Quote
GoPro, Inc.
$6.76 (-1.60%) $0.11
SeaDrill Limited Stock Quote
SeaDrill Limited
SunCoke Energy, Inc. Stock Quote
SunCoke Energy, Inc.
$6.83 (-2.15%) $0.15

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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