March Madness: Bring Out Your Dead

March Madness? Bring Out Your Dead.

This week’s Value Line update includes quite a surge for a number of companies. Take a look at the accompanying “Materially Stronger” list in the 3/29/2013 update. As a reminder, an appearance on this list means that the Value Line analyst has “step changed” the long-term low price forecast by 20-25% since the last report 13 weeks ago. And in the case of Issue 6 companies — relatively few of them are in our sweet spot or better, AFTER the bump. But they’ve gone from a return forecast dripping in red ink to in most cases, low to mid-single digits.

MORTICIAN: Bring out your dead!
[clang]
Bring out your dead!
[clang]
….
CUSTOMER: Here’s one — nine pence.
DEAD PERSON: I’m not dead!
MORTICIAN: What?
CUSTOMER: Nothing — here’s your nine pence.
DEAD PERSON: I’m not dead!
MORTICIAN: Here — he says he’s not dead!
CUSTOMER: Yes, he is.
DEAD PERSON: I’m not!
MORTICIAN: He isn’t.
CUSTOMER: Well, he will be soon, he’s very ill.
DEAD PERSON: I’m getting better!

Source: Monty Python and the Holy Grail (YouTube Video)

Insert [Value Line analyst] for CUSTOMER and you’ve got a pretty good rendition of the situation for many of the Issue 6 companies.

We have no difficulty imagining the gaggle of Issue 6 analysts in a group huddle with someone in a leadership position imploring the lot of them that these stocks aren’t dead yet. And the result of that group hug was a collective reassessment of expectations for the materials and homebuilding companies in their coverage.

In defense of the analyst gaggle, analysis of companies that have been subjected to a depression is quite challenging. The difficulty factor that accompanies normal cycles (variable frequency and amplitude) is compounded by a bath tub effect where it becomes difficult to envision “the other side.” We talked about this during the March Round Table citing conditions at Bank of America (BAC). In a nutshell, the banking industry went from a collective return on equity (along with significantly damaged book values) of 15-20% to 0-5% during the Great Recession. Many have recovered or are expected to recover to the 8-10% range — but it’s still a mystery as to how robust or rapid the recovery will be … or whether historical levels will ever be seen again.

But the current recovery is a work in progress. That is, until the next time the wheels come off and the analysts resume “bringing out their dead.”

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