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Add to MSN Stock List Message Board Related Articles 7 turkeys that are ready to soar Related Resources Check out industry winners and losers See what companies were the weeks winners and losers This years top stocks This years losers Jubak's Journal Recent articles: • Readers answer the disappearing-jobs riddle, 12/12/2003 • Turn 2003's lessons into 2004's profits, 12/9/2003 • 10 stocks the big money is buying, 12/5/2003 More... | Jubak's Journal 10 dogs ready to bark in 2004 A healthy economy will help all stocks next year, but the outsized gains may well come from beaten-up stocks in various stages of turnarounds. By Jim Jubak Are the beaten-up, the troubled and the stodgy getting ready to outperform the technology and financial stocks that have starred for most of the rally that began in March? The stars seem to be lining up that way, so Ive put together a list of 10 dogs to consider adding to your portfolio for 2004. Who makes the list? AK Steel In the last three months, the Dow Jones Industrial Average ($INDU), dominated by the likes of General Motors
Of course, you could have beaten both indexes rather handily by owning shares of such technology rockets as Yahoo But you also could have beaten the indexes, with less risk, if youd owned the beaten-up shares of troubled companies such as Scholastic, HCA and Plum, up 13%, 15% and 14% in the last three months, respectively. And you absolutely could have crushed the indexes and even those tech hi-fliers if youd owned shares of AK Steel, where top management resigned en masse in September in the face of an unexpectedly large third-quarter loss of 47 cents a share, or Washington Group, which only emerged from bankruptcy reorganization in the summer of 2002. Those two stocks were up 54% and 31% in the last three months, respectively.
4 trends that favor the hounds Do these numbers guarantee that youll do better in 2004 with stocks like these than with those that led the market up in 2003? Of course not. There arent any guarantees in investing. But consider the way the cards seem to be falling, right now anyway, for 2004.
The biggest improvements in 2004 may well come from sound but recently troubled companies. That will come as the strong economic recovery, which is what were looking at in the first half of 2004 at least, lifts all corporate boats. Turnaround companies arent the first to see better sales and earnings, but, because recent business has been so weak, the turn from the bottom can be dramatic. Boeing, for example, has been hit with everything from a Department of Defense investigation into government contracts to the collapse of both the commercial aircraft and the space sectors in 2003. Earnings per share for the year are projected to drop to $1 a share, from the $2.84 recorded in 2002, a 65% drop. The projected recovery for 2004 will take earnings back to $1.83, an 83% jump, even if its still well short of the $3.41 the company earned in 2001. Investors are looking for company-specific events that could drive above-average earnings growth in 2004 and 2005. Much of the general economic recovery already is priced into stocks. A reorganization, a change in management, a restructuring of assets all fit that bill -- and my top 10 have exactly those characteristics. The strong recent economic numbers make investors more willing to take a chance. That is, on companies going through risky reorganizations, management changes, and restructurings. Good times give those strategic moves more chance for success and give companies more margin for error. Mature turnarounds Companies like these are far enough down the restructuring path that investors can be reasonably certain that the effort is going to work. For example, about 18 months after the company emerged from bankruptcy reorganization, Washington International clearly has regained sufficient customer confidence to produce a growing backlog of engineering and construction work, including important security business. The stock still is likely to appreciate in 2004 -- $40 is a reasonable target price for a potential 18% gain, but investors shouldnt anticipate anything like the 132% gain the stock has racked up over the last 12 months. Boeing, which has climbed off a 52-week low of $24.73 to gain 60%, belongs in this group too, Id argue. Thats largely on investor faith in the proven turnaround abilities of new CEO Harry Stonecipher. Long-term investors still can earn a solid return from that turnaround, but the quick bounce is gone. (That long-term potential is why Ive added Boeing as a buy in my 50 Best Stocks in the World portfolio. For other changes in that portfolios buy list, see the update section at the end of this column.) Add Scholastic, publisher of the Harry Potter series, here as well. Reasonable-bet turnarounds Companies in this group have taken significant steps to implement a clear turnaround plan. Examples include Schlumbergers sale of the bulk of its Sema technology unit, a bad fit almost from the day in 2001 when the oil services company overpaid to acquire the business, and the companys plan to sell a stake in its smart-card unit in an initial public offering in 2004. Those are all part of Schlumbergers plan to focus on its oil services business. Investors can see the other side of that effort -- the reinvestment in that core business -- in Schlumbergers acquisition of 26% of PetroAlliance Services, a leading Russian oil-service provider. Doubts remain in many investors minds about the growth prospects for the oil-services sector. Yet, with revenue up 14% over last year, according to Sanford Bernstein, and projected to climb another 10% next year, those doubts seem to me to be overblown. Plus, the doubts do mean extra profit potential: I think a reasonable target price for Schlumberger is $63 a share, about 25% above recent prices. In this group along with Schlumberger, Id put HCA, a current Jubaks Pick with a target price of $54 a share, AK Steel and Plum Creek Timber. Still-speculative turnarounds These companies are implementing turnarounds that are still at significant risk of failure, such as Electronic Data Services, or are months, perhaps even years, away from instituting changes that would make a successful turnaround possible. Disney and Merck fall into this category. EDS has done all the right things by bringing in new management, changing its accounting to accurately calculate profit margins on new contracts and changing its business mix. But its still not clear that this will be enough. EDS still suffers from old large but unprofitable contracts and continues to face stiff competition to retain big accounts that have been targeted by aggressive competitors. EDS is in danger of losing its $7 billion contract to run the United Kingdoms tax and national insurance system. The prospects at Disney and Merck are equally uncertain, but for different reasons. There, managers who have so far proved unable to fix problems are entrenched. At Disney, even though the company faces major problems with its ABC television network, its theme parks and its flagship animated film business, CEO Michael Eisner is firmly in control of the companys board of directors. In fact, Eisners power increased with the resignation of Roy Disney, his strongest critic on the board. At Merck, similarly, CEO Raymond Gilmartin recently announced that he will stay two more years to groom his successor, even though under his regime, Merck has been unable to build a pipeline of new drugs to offset those older products going off patent. Stocks such as Disney and Merck are turnarounds waiting to happen and definitely undervalued at the moment. But its impossible at this point to predict when the new management necessary for a turnaround will get a shot at maximizing shareholder value. The best hunting for most investors is in Group Two: It offers the best potential for solid returns in a reasonable period of time, say the next 18 months. Group One stocks are more suited to quicker trigger fingers because they are closer to the end of major moves. And Group Three names require patience, patience, patience and slow-but-steady accumulation. As always, do your own due diligence. But also remember to make your picks with your own investing style and time horizon in mind. Investing in turnarounds only works if you dont change your mind before the stock changes direction. Changes to Jubak's Picks Time to update the buys and sells on my 50 Best Stocks in the World list for long-term investors. (The membership of the list itself is revised only once a year, in September.) Im adding buys on two of the stocks in todays column, Boeing and Schlumberger. Other new buys include Exxon Mobil Please note what a buy rating means for the 50 Best list: a buy indicates that, in my opinion, one of these long-term core holdings is selling at a low enough price to make this a good time to add shares to an existing position or to begin a new position. Removing a buy is an indication that the price has climbed enough so that the stock no longer is selling at a discount. It is not a recommendation to sell shares. Since the last annual revision of this list on Sept. 15, 2003, the 50 Best portfolio is up 6.5% versus a 6.2% gain for the Standard & Poors 500 and a 5.9% climb for the Nasdaq Composite. New developments on past columns The threat of the job-is-worth-less recovery IBM 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 owned or controlled shares in the following equities mentioned in this column: American International Group, Merck, Microsoft, Pepsico, and Pfizer. He does not own short positions in any stock mentioned in this column. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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