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New dawn for living-dead stocks
The recent rally has brought a number of near-dead stocks back to life. With a bit of luck, some of these have still more to climb. These are the near-dead stocks I find most interesting.
By Jon D. Markman
Like subterranean monsters awakened in a 1950s-era zombie movie, a remarkable number of long-somnambulant stocks have come to life in the past week. Whether its the re-election of the president, the decline in oil prices or the spark of a strong jobs report, Night of the Living Dead: They Walk on Wall Street is now playing on a stock exchange near you.
Some of the moves in retail stocks last week were downright spooky.- Department store chain Saks (SKS, news, msgs), for example, basically hadnt moved in 10 years if you ignored a big blip in 1998. Then came the call to the undead. On Friday it jumped 12% in a single bound.
- Or how about grocery chains Winn-Dixie Stores (WIN, news, msgs) and Wild Oats (OATS, news, msgs), down 62% and 42%, respectively, this year? They ate up 8% and 12% gains in the past week, with much of their movement coming on Friday.
- Sears Roebuck (S, news, msgs) zoomed 31% in the past week after being discounted about that much for the year.
The arousal was far-reaching. Of the 1,200-plus stocks with market capitalizations greater than $100 million that were down for the year going into last week, about a third rose more than 5% in the five days of election week. Half of those rose more than 10%.
Investors seem to have simply gotten a whiff of what President Bush is cooking up for his next term, and they couldnt wait to get started. High on the list, according to sources: A move to make the 15% tax rate on dividends and most capital gains permanent. Thats down from as high as 39.6% in the 1990s, in case youve forgotten.
Which stocks will jump next?
This jumpstart has the electrifying feel of autumn 2002, when stocks that had been designated for disaster by the bear market suddenly sprang to attention and ran for 15 months.
Related news and commentary on MSN Money
How can you identify more names that should rock before they get away? If the market continues to move up, one class of stocks that tends to do well in this environment are major-index constituents that have the lowest absolute price, the highest short interest and the worst record year to date. I have shown this effect several times -- most recently in early spring 2003, but even more emphatically in the early fall of 2002.
It works in part because investors with cash on the sidelines throw bags of money into exchange-traded funds representing the indexes first and then worry about individual stock selection later. Thus every stock, from top to bottom, feels the love. Once the cellar-dwellers get some mojo going, traders see all those low-priced names as momentum plays -- and start jamming them up. And the more these stocks move up, the more that short-sellers are forced to buy back shares -- generating a short squeeze that sends prices higher and higher. Plus, of course, there are value players who are buying the stocks anyway.
Explosive mix
Real buying from value funds combined with momentum buying from traders and panic buying by retreating short-sellers make a concussive cocktail. In October 2002, a few days after the bottom of this decades market, I noted that stocks under $5 in the S&P 500 ($INX) with those characteristics were likely to explode. And they did: My list of 14 has risen about 325% as a group since then, including +980% for Avaya (AV, news, msgs), then $1.49; +685% for AES (AES, news, msgs), then $1.44; and +515% for Lucent Technologies (LU, news, msgs), then 58 cents.
So what are the stocks on that list now, and what are their prospects? For my analysis of the S&P 500 then, I focused on stocks under $5. Now, after a year and a half of advancement, I needed to lift the maximum price bar to $13. Heres the new list:
| Lowest-priced S&P 500 stocks: Ready for takeoff? | | Company | Industry | 11/5 close | % Change YTD | Short ratio (%) | | Calpine (CPN, news, msgs) | Electric utilities | $2.83 | -41.2 | 12 | | Qwest Communications (Q, news, msgs) | Telecom services | $3.62 | -16.2 | 3 | | Winn-Dixie Stores (WIN, news, msgs) | Grocery stores | $3.72 | -62.6 | 17 | | Delta Air Lines (DAL, news, msgs) | Major airlines | $6.15 | -47.9 | 13 | | Visteon (VC, news, msgs) | Auto parts | $7.60 | -27.0 | 15 | | Power-One (PWER, news, msgs) | Diversified electronics | $8.01 | -26.0 | 5 | | Allied Waste Industries (AW, news, msgs) | Waste management | $8.76 | -36.9 | 7 | | Delphi (DPH, news, msgs) | Auto parts | $8.80 | -13.8 | 5 | | Charles Schwab (SCH, news, msgs) | Investment brokerage | $9.72 | -17.9 | 4 | | Unisys (UIS, news, msgs) | Information technology services | $10.65 | -28.3 | 4 | | Tenet Healthcare (THC, news, msgs) | Hospitals | $10.91 | -32.0 | 17 | | King Pharmaceuticals (KG, news, msgs) | Drug manufacturing | $10.96 | -28.2 | 6 | | Micron Technology (MU, news, msgs) | Semiconductors | $11.88 | -11.8 | 6 | | Big Lots (BLI, news, msgs) | Discount, variety stores | $12.41 | -12.7 | 8 | | Interpublic Group (IPG, news, msgs) | Advertising agencies | $12.46 | -20.1 | 11 |
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This is your typical roster of rascals -- companies surrounded by clouds of condemnation for misdeeds real and imagined. If they do move, bears will discover that many seemingly intransigent business issues will be erased by higher stock prices.- Take Winn-Dixie. Please! This was one of the leading grocery chains in the South for years, but it has been marginalized by the ridiculously low prices available at Wal-Mart (WMT, news, msgs). Rumors abound that it will need to file for bankruptcy protection. But it could still survive with a simple restructuring that includes the sale of several stores for their real estate value. That is the ploy that put the kick in Kmart (KMRT, news, msgs) shares this year, and it seems to be inspiring Sears buyers as well. Winn could easily be a $10-$12 stock in two to three years if a few things go right and investors revalue its price/sales multiple upward.
- Ditto Delta Air Lines (DAL, news, msgs). Lower energy prices are really all this airline needs to avoid bankruptcy protection and win concessions from its unions. It could get to $10 in a year.
- Calpine (CPN, news, msgs) was once the darling of the new-age power world, with a dynamic plan to create a new generation of smaller electricity plants around the country. Calpine took on too much debt, however, and has been struggling for the past two years to sell assets and cut its interest payments. Recent earnings reports suggest that it is on track, and lenders have shown no interest in pulling the plug. It can certainly get back to the $6-$8 range over the next two years if its restructuring plan works out, and it should.
Over on the Nasdaq, if you do a similar analysis for stocks with market capitalizations of at least $500 million, you come up with names like Siliconware Precision Industries (SPIL, news, msgs), Amkor Technology (AMKR, news, msgs), Align Technology (ALGN, news, msgs), Wireless Facilities (WFII, news, msgs), Power-One (PWER, news, msgs) and Lattice Semiconductor (LSCC, news, msgs). All are trading for less than $10, are under water this year and have begun recoveries.
Of these, semiconductor capital equipment maker Amkor, which closed Friday at $5.52, looks particularly interesting. This company has repeatedly lowered earnings estimates in the past year and disclosed an informal SEC probe into trading by insiders. It seems that sellers are washed out, though; the stock has stabilized at this level and is moving higher. Insiders have been buying the stock all year, at much higher prices. In a decent recovery, the stock should certainly get to $7, but $10 is definitely in sight if the outlook for chip production only improves a little in the second half of next year.
Align Tech is another low-priced name that could have a nice recovery. Maker and marketer of the popular Invisilign orthodontics system, it tumbled from its perch in the $22 area to a low of $8.85 last month after issuing an earnings report that wasnt up to analysts expectations. It has begun, however, to recover nicely. After its plunge last month, insiders bought $4.1 million worth of the stock at $9.50 to $10.50 -- just a breath away from the current quote of $10.99. A reasonable recovery should take the stock back to the $16-$18 area over the next two years.
All of these living dead are risky. So, if you take one, beware of real danger. But if a broad recovery does materialize, their humbled but rejuvenated spirits will surprise a lot of skeptics.
Fine Print
In last weeks column, I forecast a Kerry victory and a Nasdaq rally. One out of two aint bad. And the stocks I recommended there -- including Autodesk (ADSK, news, msgs) and Cognizant Technology Solutions (CTSH, news, msgs) -- also did well. Ill continue to track that list. . . . Speaking of which, my list of crazy momentum names (25 momentum stocks for the gambler in you) is up 17% as a group in the past week, paced by huge jumps in Travelzoo (TZOO, news, msgs), Riviera Holdings (RIV, news, msgs) and Isonics (ISON, news, msgs). A lot of those names still look good.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, he held positions in the following stocks mentioned: Autodesk, Cognizant Technologies and Isonics.
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