Three Underperformers That Don't Add Up

This article originally appeared Jan. 27, 2014, on Real Money. To read more content like this, + see inside Jim Cramer's multi-million dollar portfolio for FREE -- Click Here NOW.

I have been asked several times if I think this is a great buying opportunity, and the only thing I can do is wonder what everyone is thinking. So far, this is just a bump in the market advance. It may turn into something more serious, but it has not yet created any excess of inventory for value investors. The stuff that is down this year is the same stuff that has been going down for some time now, like miners and energy. Shipping stocks have been selling off a little but most of these have had huge runs and it's not yet time to think about initiating or adding to positions in most of the group.

It is time to think about playing defense in your portfolio. I have no idea if the selling begins again and takes us to substantially lower levels. I do know that if it does, the last thing you want is to be caught holding companies that are richly valued yet have poor fundamentals and prospects. Even if the market shakes off the emerging-market problems and continues to rally it is likely that these stocks underperform substantially, so there really doesn't seem to be many reasons to hold them.

CarMax (KMX) is a good example of such a stock. The auto dealer is just not seeing anywhere near the growth to justify the current 20 price-to-earnings ratio and price-to-book-value ratio of more than 3. The company is seeing single digit earnings growth this year and this will likely be the case next year as well. The Enterprise Value-to-EBITDA ratio is a whopping 17, so it is tough to make a case for the stock being reasonably priced . The prospects do not look all that promising as the Piotroski F-score is 2 on a scale of 0 to 9, indicating the operating and financial conditions are getting worse, not better. There is no strong reason to own or hold the stock now.

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