5 Struggling Stocks That Will Turn Around in 2017

More than 100 issues in the S&P 500 have fallen in price this year, including dozens that have slumped by more than 10%. Drugmakers and other health care companies, pressured by concerns about weakening prices for their products, feature prominently on the loser’s list. Stocks in industries such as automotive parts, footwear, real estate and software also make the roster of laggards.

1. Allergan - AGN - Investors seem to be losing confidence in Allergan’s ability to grow. The company hauls in more than $15 billion a year from pharmaceutical products, led by its cosmetic-treatment drug Botox, its biggest-selling product, and Restasis, a medication to treat chronic dry eye. But the number of prescriptions written for Allergan’s drugs in the U.S. fell by 7.2% in the first 10 months of 2016, compared with the same period of 2015. Yet Allergan retains some formidable strengths. The firm is sitting on more than $27 billion in cash and securities—about 14% of its market value—following the sale of its generic drug business to Teva Pharmaceutical Industries (TEVA). Allergan recently announced plans to spend an additional $10 billion on share buybacks, which should help lift earnings per share by more than 17% in 2017. The firm has also initiated its first dividend, starting in 2017, at an annualized rate of $2.80 per share.At 13 times earnings, the stock looks cheaper than other big drugmakers, which trade at an average of 16 times estimated year-ahead profits, says analyst Jeffrey Loo, of S&P Global Market Intelligence. Over the next 12 months, he sees the shares hitting $260.
2. Chipotle Mexican Grill - CMG: Chipotle’s stock has been pulverized by one corporate blunder after another. The troubles started in late 2015 after the burrito chain reported an outbreak of E. coli bacteria and other food contaminants at some restaurants. Sales at restaurants open at least a year plunged by 14.6% in the fourth quarter of 2015, compared with the year-earlier period. Yet 2017 could finally be a turnaround year for the stock. The fast-casual chain has laid out plans to boost sales and profit margins, aiming to hold down costs, introduce new food items (such as desserts) and expand further into Europe. The firm intends to open between 195 and 210 new restaurants over the next year. Chipotle is also scrapping its recently launched ShopHouse Asian Kitchen restaurants to refocus on its core business, and it is investing in digital technology to speed up ordering and sales.
3. Coty - COTY: Beauty products maker Coty underwent an extreme makeover in 2016. The firm acquired 41 cosmetic brands from Procter & Gamble (PG), including fragrances sold under the Hugo Boss, Dolce & Gabbana and Gucci names, CoverGirl cosmetics and Max Factor makeup. Coty paid a hefty $11.6 billion to buy the business. But the deal, which closed in October, will nearly double the firm’s annual sales, to about $8.4 billion, making Coty the world’s third-largest cosmetics maker, after Estee Lauder (EL) and L’Oreal (LRLCY) (at number one). Nonetheless, this could be a timely buying opportunity. Coty is “just at the start of a new era” following its merger with P&G’s beauty brands, says Bank of America Merrill Lynch analyst Olivia Tong. With a larger manufacturing base and greater distribution scale, Coty should be able to drive down costs and improve profit margins. Tong estimates that Coty will earn $1.13 per share in the fiscal year that ends in June 2018, up 16% from fiscal 2017. The stock should hit $23 over the next 12 months, she estimates.
4. Lennar - LEN: Rising mortgage rates pose a threat to homebuilders such as Lennar, whose shares have been sinking as rates have jumped this year. Higher rates make houses less affordable and reduce the value of builders’ land and housing inventory. Profit margins for builders could also face pressure if labor and material costs rise without a corresponding increase in prices.Yet housing demand should continue to climb as employment expands and wage growth picks up. The number of new homes under construction remains well below levels before the Great Recession. The trend is keeping a lid on inventory and helping builders maintain prices, benefiting Lennar. In the three-month period that ended November 30, the builder delivered 8,228 homes, a 7% increase from a year earlier. The company also pushed through price hikes averaging 2.9%, raising its average price per home to about $357,000.The second-largest publicly traded homebuilder, Lennar constructs more than 25,000 homes a year in 18 states.Lennar isn’t just a builder of single-family homes, though. Its other businesses now include financial services, construction of luxury rental apartments, commercial development and property management. These businesses may help Lennar weather a slowdown in demand for new single-family homes. Lennar has also been an “astute land manager,” says Merrill, selling some real estate before the 2007-09 downturn and buying land early in the recovery—moves that have helped support profit margins
5. Tractor Suppy - TSCO: Products for livestock and pets account for nearly half of the company’s revenues, but the firm sells loads of other goods, such as tools, outerwear, and lawn and garden items. Even with 2016’s poor performance, Tractor Supply’s niche as a rural-lifestyle retailer made it one of the hottest stocks in the S&P 500 over the past decade, producing a stunning 636% total return (22.1% annualized), including dividends.Although Tractor’s growth is slowing, the company still sees an opportunity to reach 2,500 stores in the U.S. The firm recently announced plans to buy Petsense, a chain of more than 130 pet-supply stores that will help it ramp up sales in the lucrative market for pet products.At 22 times estimated year-ahead earnings, Tractor doesn’t look cheap. But the shares have traded at an average of 28 times earnings over the past five years, according to Morningstar, making the current valuation somewhat more palatable. The stock is likely to keep rising as the company keeps building on its rural-lifestyle success.

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