"Hope springs eternal in the human breast" wrote Alexander Pope way back in 1733. That thought applies today to a lot of investors who buy or consider buying depressed stocks with the hope they will regain their former glory.
It is always better to be guided by reality than by dreams. For example, shares of Baltimore-headquartered MNC Financial sold in the 20s only last year. They're about 4 now and there are many points between the two prices that some investors think can be recaptured. The same may be said of Landover-based Dart Group, the holding company for majority interests of Crown Books and Trak Auto, and half-owner of the Shoppers Food Warehouse chain.
A few years ago, Dart sold for $160 to $170 a share; recently the stock was in the low $60s. The same astute management operates Dart and both Crown and the Shoppers chain are doing better, but a share price rebound is unlikely.
Stock prices change for a variety of reasons. Understanding them is a key to knowing whether certain stocks are worth buying for the possibilities of major price recovery.
MNC Financial is a battered company that is unlikely to recover many points in the foreseeable future. Its profitable credit card business has been sold, and MNC's bank subsidiaries are loaded with hundreds of millions of dollars in bad real estate loans. MNC's resources have been greatly strained, and the soft economic climate is a major obstacle to hurdle even for less-encumbered financial institutions.
Dart's lowered share price is due to different factors. During the 1980s, the Haft family, which controls Dart, made a lot of money in corporate takeover attempts -- by buying shares of other companies and threatening to acquire those companies, thus boosting the prices of their stocks and eventually selling Dart's holdings of those shares at large profits. This method worked a number of times; it was foiled only once, when Dart bought shares in the Dayton-Hudson retail chain but sold them at a substantial loss when the stock market collapsed in 1987.
Dart's earnings were elevated by these trading profits. This concept is largely passe now and Dart must rely on earnings of its own retailing subsidiaries. Even at 64, Dart has a price-earnings ratio that is too high to support the price.
When the recession ends, some investors reason, home-building firms such as the Ryland Group of Columbia will see their earnings pick up dramatically. Several years ago, Ryland shares were priced in the 30s; last year they sold for under 10. The current price is about 22 but, supposedly, we are much nearer the end of the recession. That, plus considerably lower interest rates should spur the depressed home-building industry, investors reason. Ryland's earnings for the latest 12-month period are well under $1 a share; Ryland was earning more than $3 a share in the late '80s.
Unlike the other companies, Ryland's profits recovery and thus share price rebound is more likely to occur because the lower earnings are not a result of management policies.
The Marriott Corp. of Bethesda is also price-depressed. When many investors think of Marriott, they recall uninterrupted years of growth. Then came real estate financing for the company's hotel properties and a slump in the hotel business. The share price tumbled, as have profits. Marriott's chief executive became ill at a time when the firm's problems were evident and public confidence in general had waned.