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5 stocks with something special
In a market like today's, investors need stocks that'll tag along and get an extra kick from something like a reorganization or a strategy shift.
By Jim Jubak
Well, it's a rally, even if it's not an especially exciting one. Still, it's certainly better than a poke in the eye with a sharp stick.
Since the bottom for the Dow Jones Industrial Average on April 20, the index had climbed by 4% as of the close on May 9. The Nasdaq Composite, which bottomed slightly later on April 28, was up 4%. In the 13 days since that April 20 bottom, the Dow finished up on nine days and down on just four.
But a 4% rally isn't exactly the kind of strong tide that lifts all boats. The bulls continue to run for cover whenever oil prices climb, as they did May 10, and the cyclical industrial and materials stocks that led the market in 2004 sell off whenever investors start to worry about slowing growth.
In a market like this, investors need stocks that combine strong momentum -- so they'll follow the rally -- and a special story of the sort that can give an individual stock an extra boost and put it ahead of the averages. That something special can be anything from a reorganization that shifts a company to a growth industry from a cyclical, to a turnaround plan that revitalizes sales, to a reinvestment strategy that milks a cash cow to feed new growth businesses, to the settlement that ends a company's legal troubles.
The three stocks I've picked for CNBC's "Morning Call" this week all have one of those special stories going for them.
More than bananas
Chiquita Brands (CQB, news, msgs) has been reducing its reliance on bananas since the company emerged from bankruptcy in 2002. The most recent move is the proposed acquisition of the Fresh Express fresh-packed salad business from Performance Food Group (PFGC, news, msgs) for $855 million in cash. The deal, announced in February, has been hanging fire for months while Chiquita and its financial institutions straighten out some unspecified "legal matters." But the company stated in its May 10 earnings report that it still expects the deal will close in the second quarter.
With the acquisition, bananas would account for just 42% of the company's revenue. Why is that important? Because by broadening its business, Chiquita introduces more predictability into its earnings, which should earn the stock a higher multiple from investors. Those new businesses also give Chiquita something to do with the $94 million in operating cash flow the company generated in 2004.
The stock trades at 19.5 times 12-month trailing earnings per share. Our StockScouter rated the stock a 10 out of a possible 10 on May 11.
A big shift
John H. Harland (JH, news, msgs) knows that it's traditional business, printing checks for banks, is going away. With volumes declining and margins getting squeezed it's likely that operating income from the check printing business will fall 30% this year. Investors have focused on that, which is why the stock trades at just 14.5 times projected 2005 earnings.
But over the last 10 years John H. Harland has been busy investing the cash thrown off by its check-printing business into new growth businesses such as the equipment to read optical codes made by its Scranton division and its software operations. 2005 could mark a major milestone for that effort: The optical and software businesses are likely to bring in more operating profit than the company's traditional business. Wall Street projects earnings growth of 12% this year and then 20% in 2006. That jump in 2006 growth should be enough to get investors' attention. Our StockScouter rated the stock a 6 on May 11.
Beyond cyclical
Ingersoll-Rand (IR, news, msgs) is turning itself from a cyclical business to one able to be a growth business. But Wall Street hasn't quite caught up with the change, and the stock is still awarded the same low price-to-earnings ratio that cyclical stocks always get. This makes sense since earnings growth at cyclical companies soars and then plummets as the cycle rolls on: Investors pay less because of that predictable unpredictability.
But with the sale last October of its energy equipment business, the company has gotten rid of most of its most cyclical business. The cash from these divestitures has gone into beefing up the company's new growth businesses. For example, the $1.2 billion in cash from the sale of the energy equipment business helped Ingersoll-Rand buy 70% of Italian maker of electronic locks CISA for $535 million in cash. The deal strengthens Ingersoll-Rand's security and safety division. The stock trades at a cyclical-like P/E ratio of 11. Wall Street projects earnings will grow by 17% this year and 13% in 2006. Our StockScouter rated the stock a 7 on May 11.
And, as always, besides my picks on CNBC's Morning Call (catch me at 11:20 a.m. on Wednesdays) I have two more exclusive picks for CNBC.com on MSN readers.
Exclusive picks
Raytheon (RTN, news, msgs) is digging itself out from under a series of investigations and shareholder lawsuits that have kept the stock under pressure for most of this year. On April 15 the company announced that it had offered to settle a Securities and Exchange Commission inquiry into the way it recognized revenue at its Raytheon Aircraft unit. (Raytheon placed its CFO on leave as a result of the investigation. The SEC's staff has recommended action against the CFO and one other non-executive employee.) In addition, Raytheon has agreed to pay $39 million to settle a shareholder suit related to the sale of its engineering and construction business to Washington Group International (WGII, news, msgs).
Through all this, sales and earnings at the defense contractor have just kept chugging along. Wall Street projects that earnings will climb by 31% this year and 24% in 2006. The shares trade at 20 times projected 2005 earnings. Our StockScouter rated the stock a 6 on May 11.
J.C. Penney (JCP, news, msgs) turned its business around during the 44-month tenure of CEO Allen Questrom and the momentum of those improvements in merchandise mix and operations will keep driving earnings for new CEO Myron Ullman. Ullman, a veteran of retailing at Macy's, Duty Free Shipping and LVMH Monet Hennessey Louis Vuitton, wants to use the company's new logistics system to increase inventory turns to at least the industry average of 10 from the current 8.6.
Wall Street projects that earnings will grow by 38% in the fiscal year that ends in January 2006. The stock current trades for 16 times projected earnings for fiscal 2006. Our StockScouter rated the stock an 8 on May 11.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak didn't own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
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