In recent weeks, my Wednesday commentary has focused on highlighting a company from Barchart.com’s daily list of the top and bottom 100 stocks to buy.
In today's edition, I'm going bargain hunting, looking for a stock in the bottom 100 stocks to buy that can come out of its tailspin. Keep in mind, however, that risk-averse investors won’t be interested in what I'm selling. And that's okay.
The top bottom-100 stock to buy on Wednesday is Mullen Automotive (MULN), an EV manufacturer. Its weighted alpha is 98.90%, and its stock is down 99.82% over the past 52 weeks.
While it is a transportation stock, it is not the one I think might be able to pull out of its tailspin.
I chose Forward Air Corp. (FWRD), a Tennessee-based provider of ground transportation and related logistics services to the North American air freight and expedited LTL market.
Currently ranked 84th in the bottom 100, its weighted alpha is 73.70%, while its share price is down 71.73% over the past 52 weeks. The Barchart Technical Indicator rates it a Strong Sell.
Despite the doom and gloom, here’s why aggressive investors might want to take a closer look.
Sales and Operating Profits Way Down
Forward reported its Q4 2023 results on Feb. 28. They could have been better.
On the top line, sales were down 16.0% to $338.4 million. Its operating profit in the quarter fell nearly 95% to $3.0 million from $56.3 million a year earlier. Its net loss on a GAAP basis was $14.7 million, down from a $39.0 million profit in Q4 2022.
For 2023, its sales were $1.37 billion, 18.4% lower than in 2022, and its operating income decreased 64% to $88.2 million.
If you’re unfamiliar with Forward’s business, here’s why it’s gone to rat poop in 2023.
In August 2023, Forward announced that it would merge with Omni Logistics in a cash-and-stock transaction valued at $3.2 billion. The combined businesses would have an annual revenue of $3.7 billion. Forward shareholders would own 62.3% of the merged entity, with Omni’s shareholders owning 37.7%.
So far, so good.
However, less than two months later, Forward tried to get out of the deal because activist investors felt it wasn’t a good deal for the company or its shareholders. Forward and Omni went to court to resolve the situation.
Ultimately, the two parties agreed to a lower purchase price in January. Forward would pay $20 million in cash, down from $120 million, and Omni’s shareholders would wind up with 35% of the combined company, down from 37.7%.
“The revised agreement enables Forward to accelerate its long-term Grow Forward strategy and positions the combined company as the premier provider of choice in high-quality freight transportation,” CEO Tom Schmitt said at the time in a press release.
“We believe this highly compelling acquisition will deliver significant long-term shareholder value, and we look forward to swiftly closing the transaction so we can begin to capitalize on the many exciting opportunities ahead.”
The transaction was completed on Jan. 25.
The Elephant in the Room
The big problem with the acquisition was that Forward’s freight forwarding customers felt integrating Omni, a freight forwarder and competitor, would make the combined entity a direct competitor.
Furthermore, Omni's addition would increase its debt load while diversifying its revenue streams to an unmanageable level.
“This statement from Forward rankled some of its customers: ‘The acquisition removes an organization’s gross margin between shipper and destination, allowing Forward to go directly to shippers while maintaining and growing with historic wholesale customers,’” FreightWaves contributor Todd Malden reported the comments of an anonymous Forward Air customer in August 2023.
“‘Well, that’s exactly what the forwarders don’t want,’ the source said. ‘They’re going to gamble 90% of their customers for 10% [Omni]. Does that make sense?’”
On Feb. 7, just two weeks after the merger closed, the board made CEO Tom Schmitt walk the plank, promoting Chief Legal Officer Michael Hance to interim CEO. It continues to look for a permanent CEO.
At the same time Schmitt was let go, Fitch lowered its outlook for Forward to Negative.
“Execution on organic growth and profitability initiatives, above Fitch's assumed market improvements, realization of EBITDA synergies, and integrating and operating the new forwarding business line in a way that does not cause high customer attrition will be key drivers of FWRD's financial performance over the next few years,” Fitch’s Feb. 6 press release stated.
It recognized that going direct to customers could strengthen its position in the premium LTL (less-than-truckload) markets.
The Patient Investor Could Win
It is evident to me, someone who had rarely given any thought to Forward Air’s business in the past, that FWRD stock is down 75% since the end of July when investors first got wind of the deal. Investors feel there might not be an LTL business if it doesn’t integrate Omni in such a way that existing customers don’t feel they’re being sold a bill of goods.
That’s a mouthful, I realize, but given it’s traded as high as $121 over the past 52 weeks, there is a lot of upside to shoot for here. That’s why the options volume is unusually active.
If you look at its two-year history (March 2022 to March 2024), you’ll see that in 2022 there were six days with a volume of 1,000 or more. In 2023, that number jumped up to 23, with most of the days after the transaction was announced. So far, in 2024, there have been 14 days over 1,000 through the first 2.5 months of the year.
The Dec. 20 $60 call currently has an ask price of $0.85, a down payment of 1.4% on the $60 strike. There isn’t any volume today, but there are 20 call contracts for this strike.
An $85 bet on this beaten-down stock is an excellent risk/reward position for aggressive investors.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
