John Dorfman—Stocks Languishing Near Lows May Yield Great Upside

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One way to find bargain-priced stocks is to keep your eye on the list of shares making new 52-week lows.

Each year in the first week of March, I recommend half a dozen stocks from the new-lows list that I think have good rebound potential. My first list, from March 1999, rose 30 percent in the following year, compared with a 14 percent rise for the Standard & Poor’s 500 Index, including reinvested dividends.

The list from a year ago rose 85 percent, while the S & P; 500 fell 9.7 percent.

Litton Industries Inc., the stock I singled out as my favorite last March, is up 169 percent, partly because of a takeover offer from Northrop Grumman Corp. Burlington Northern Santa Fe Corp. rose 51 percent, Naaco Industries Inc. 62 percent and York International Corp. 71 percent. Alberto-Culver Co. is up 77 percent and BancWest Corp. 81 percent.

Now it is time for my third annual attempt to troll the new-lows list for bargains. First, a word of caution.

Much as I enjoy compiling this list each year, I don’t expect it beat the S & P; 500 by 95 percentage points again. That’s probably a once-in-a-lifetime result.


Six with potential

More than 800 stocks hit new 52-week lows on U.S. stock exchanges in the week that ended March 2. Here are six that I think have good rebound potential: Cypress Semiconductor Corp., Pre-Paid Legal Services Inc., Montana Power Co., Andrew Corp., Kenneth Cole Productions Inc. and CNH Global NV.

Cypress Semiconductor, based in San Jose, makes semiconductors used in computers and in communications equipment such as switches and routers. Its stock has fallen to $18.86 a share from a September high of $48.

That 60 percent drop reflects investor concerns about a slowdown in the personal computer and telecommunications industries. I think the fears are a bit overdone. I’d say that Cypress shares are alluringly cheap right now at 8 times recent earnings, 1.8 times book value (corporate net worth per share) and 1.9 times revenue.

Pre-Paid Legal Services, based in Ada, Okla., sells legal expense plans that resemble insurance to cover customers’ legal costs. Customers who use a law firm participating in the plan normally pay nothing, or only a small fee, for services such as writing a will.

Pre-Paid stock sells for 8 times recent earnings, 2.8 times book value and 1.7 times revenue. Why so cheap? One reason is that the company has used an accounting practice regarding agents’ commissions that many people consider too aggressive.

On the plus side, Pre-Paid has virtually no debt. Its insiders have tended to be buyers of their own stock. I wouldn’t be surprised to see a negative restatement of Pre-Paid’s past earnings, but I think the company’s basic business concept is sound and the stock is undervalued.

Montana Power, based in Butte, Mont., is an electric utility that is transforming itself into an unregulated nationwide fiber-optic telecommunications company. It used to have an oil-and-gas exploration and production operation and a coal mining business. It sold both of them in the past year, and expects to sell its utility business within the next 60 days.

Assuming that happens as planned, the company will change its name to Touch America, which is the name of its telecommunications business. That’s a pretty glamorous business for a company with a price-earnings ratio of 9.


International diversity

Andrew Corp., based in Orland Park, Ill., has been in the communications business all along. It makes a variety of communications equipment including coaxial cable, antenna towers, radar systems, earth stations and cellular phone accessories.

Andrew Corp. gets about 60 percent of its revenue in the United States and 40 percent in Europe, Australia and Canada. That international flavor may help the company if the U.S. economy goes into recession this year (assuming, of course, that the other economies don’t topple as well). Debt only amounts to 20 percent of Andrew’s equity, and I consider the stock reasonably priced at 15 times earnings.

Kenneth Cole is one of those companies built around a designer. Kenneth Cole (the person) owns more than 80 percent of the voting shares of Kenneth Cole (the company). Based in New York, the company designs and markets shoes, handbags, luggage, sunglasses, ties and other accessories. Manufacturing is contracted out worldwide.

The company’s stock took a hit recently when the company warned that earnings would fall short of analysts’ expectations. After growing at a 48 percent clip the past two years, earnings are expected to rise only 4 percent this year. But the company’s brand is well positioned, its balance sheet is debt free, and I think the stock looks good at 16 times recent earnings.

Finally, as a flagrant speculation, I like the U.S.-traded shares of CNH Global, a farm machinery company based in Amsterdam.

CNH is speculative for a number of reasons. Debt is more than five times equity. The company posted a large loss last year and is expected to post another loss this year. And since CNH is 85 percent owned by Fiat, trading in CNH is less liquid than the $2.2 billion market value would suggest.

On the positive side, CNH earned more than $2 a share in 1994 and 1996, and more than $3 a share in 1997. So there is latent earnings power if and when the farm economy turns around.

John Dorfman is a columnist for Bloomberg News.

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