D.R. Horton, Nucor top Casualty List, have rebound potential Dorfman

A stock can be down but not cheap, or cheap but not down.

The stocks on my Casualty List are both. They are stocks that have been pummeled in the latest quarter and that I think have strong rebound potential.

I'll lead off my latest Casualty List with D.R. Horton Inc. (DHI), the largest U.S. homebuilder. Seven-percent mortgages have been poisonous to homebuilders, and Horton was down 26% in the fourth quarter - in a rising market, at that.

If you had held Horton for the past 10 years, you would have made 543% on your investment (as of Jan. 17). When people got excited about the Federal Reserve easing interest rates, the stock climbed within a few pennies of $200. But now it has fallen to about $148.

Home prices are too expensive for builders' own good. The supply of homes is pinched because people don't want to move and get an expensive mortgage to replace their cheap one.

Horton shares languish at about 10 times the company's per-share earnings. I consider it - and many other homebuilders - to be a bargain at current quotes. There's a lot of pent-up demand for single-family homes.

Nucor

Next up in the hospital ward is Nucor Corp. (NUE), the nation's largest steel manufacturer, down 22% in the fourth quarter. Steel companies already enjoy some tariff protection from imports, and if President Trump has his way on tariffs, they will soon have more.

Nucor's sales and profits both fell sharply in 2024, as demand was weak in the automotive, housing and office-building markets. But normally, the company has done well. In the past 10 years, it has averaged better than 10% sales growth per year, and earnings have outpaced sales.

Of the 14 analysts who follow Nucor, eight call it a "buy," five a "hold" and one a "sell." I find this encouraging, not because "buy" ratings predominate, but because opinions are split. I prefer an uncertain outlook because it means the stock has a better chance of surpassing expectations.

Huntington Ingalls

Smacked for a 28% loss in the fourth quarter, Huntington Ingalls Industries Inc. (HII) is the largest builder of ships for the U.S. Navy and has close to a duopoly in that business with General Dynamics Corp. (GD).

In announcing disappointing earnings for the third quarter, Chris Kastner, the chief executive, noted that the contracts for "nearly all of the ships currently under construction were negotiated prior to Covid." Since then, he said, "we have seen a significant loss of shipbuilding experience in our yards."

In less than a year, the stock has fallen from $299 to about $203. I think that's overkill. The company has earned a return on equity of 20% or better (excellent, by my lights) in nine of the past 13 years.

Congress may well increase spending on naval warships. According to the Center for Strategic and International Studies, China now has 234 warships, surpassing the U.S. total of 219.

Peabody Energy

Many people thought the coal industry was dead meat, but it's revived with increasing demand for electricity and support from Donald Trump. Peabody Energy Corp. (BTU) has a pretty good balance sheet, with debt only 12% of the company's net worth.

Peabody shares fell 21% in the fourth quarter, as investors disliked its acquisition of the metallurgical coal business of Anglo American. Perhaps coal is a buggy-whip industry, but with Peabody stock at five times earnings, I think it's a good speculation.

Past record

The Casualty List you're reading is the 87th one I've compiled. One-year returns can be calculated for 83 lists, and the average one-year return has been 14.8. That beats the 11.5% average for the S&P 500 Total Return Index over the same intervals.

Fifty-three of my Casualty Lists have been profitable and 39 have beaten the index.

Bear in mind that my column results are hypothetical and shouldn't be confused with results I obtain for clients. Also, past performance doesn't predict the future.

Results of my picks a year ago were disappointing. Target Hospitality Corp. (TH) and Ovintiv Inc. (OVV) were up 15.9% and 13.1% respectively, but fell short of a surging S&P 500 at 26.1%. My other two picks lost ground. BorgWarner Inc. (BWA) slipped 0.2% and Patterson-UTI Energy Inc. (PTEN) fell 6.2%.

Averaging those four stocks together gave an anemic 5.7% return. Let's hope that today's crop does better.

Disclosure: I own D.R. Horton for one or more clients. I own General Dynamics personally and for most of my clients.

John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts. He or his clients may own or trade securities discussed in this column. He can be reached at [email protected].