Markets
Seven Bargain Stocks
Unknown and unloved, these stocks hold the potential for big gains.
By David Landis, Contributing Editor
Jeffrey R. Kosnett, Senior Editor
From Kiplinger's Personal Finance magazine, November 2006
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Analyst David Moskowitz, of Friedman Billings Ramsey, says Akorn shares could hit $8 within a year, more than double the recent price. The stock hasn't been worth $8 since 2000, but Moskowitz says that the presence of numerous potential growth opportunities supports his target price.
"Basket" maker
If you shop online, you probably haven't placed Art Technology Group's products in your electronic shopping basket. But the basket itself may have been Art Tech's. The Cambridge, Mass., company makes software that powers online shopping sites for more than 600 firms, including Best Buy, PayPal and Target.
One of the early players in e-commerce, Art Tech found success as a supplier of the dedicated servers that underlie online shopping sites. When those servers became commonplace, the firm moved into specialized software that made shopping easier and more efficient. But the shift wasn't smooth, as the technology bust killed off many customers. Art Tech's shares plunged from $122 in July 2000 to less than a buck 15 months later.
But the company hung on. After losing money in 2001, 2002 and 2004, Art Tech was once again profitable last year as a growing number of firms began replacing their homegrown e-commerce systems with more-sophisticated software. Sales rose 31% in 2005, and the company says they could rise another 16% this year.
Art Tech's products manage everything from e-mail campaigns that are designed to drum up new business to tools that analyze customer behavior. Profits can be volatile, though. About two-thirds of revenues are from predictable consulting services, but the remainder depend on the sale of new software licenses, "which is a blood-pressure-medicine-required business," quips chief financial officer Julie Bradley. Prudential Securities analyst John McPeake says the stock could reach $3.50 in a year, up 33% from the mid-September price of about $2.60.
Cheap contractor
Outsourcing is one of the hottest trends in business. Yet Solectron, once the world's largest contract electronics manufacturer, with factories around the globe, has lost money in four of the past five years. In its defense, Solectron's form of outsourcing, which caters primarily to computer, networking and telecom companies, has been less than a gold mine lately. But the Silicon Valley company compounded its woes by moving too slowly into new areas of opportunity, such as consumer electronics, medical devices and automotive products.
But things are changing steadily under CEO Mike Cannon, who took over in 2003. Solectron has closed plants, adopted low-cost manufacturing techniques, slashed its workforce by 27,000 (to 53,000) and reduced its debt from $3.8 billion at the end of 2002 to $700 million currently. Last year, it broke even on sales of $10.4 billion, and analysts estimate it earned 14 cents a share in its recently concluded fiscal year.
The outsourcing market for electronics manufacturers like Solectron is expected to grow a healthy 11% annually. And there are signs that business is improving. Solectron's revenues have risen for three straight quarters, and third-quarter sales of $2.7 billion were up 4% from the year-ago period. Meanwhile, the stock, trading at only 30% of sales per share, looks cheap. Argus Research analyst Jim Kelleher says it could be worth $6 in a year.
Battered biotech
It's been an awful year for some unseasoned biotech stocks. Shares of hopefuls such as Neurocrine Biosciences and Adolor plunged 50% to 85% because of poor results or other regrettable events. But as is often true, investors may occasionally throw out the baby with the bath water.
That may be the case with Ariad Pharmaceuticals. Shares of the Cambridge, Mass., company have sunk nearly 50% over the past year. But unlike most biotech flameouts, Ariad has passed a key hurdle: It has reached the third and final phase of patient trials with its major product, Ariad 573, a drug to treat a vicious form of cancer called sarcoma and, secondarily, breast, pancreatic and prostate cancers. Analyst Terence Flynn, of Lazard Capital Markets, says 573 (a catchier name is presumably in the works) could be a $200-million-a-year revenue generator by 2010.
Ariad also expects to receive, pending appeals, a one-time payment of $65 million from a patent lawsuit against Eli Lilly over two drugs that Lilly now markets, as well as estimated future royalties of about $20 million. That's serious money for a company that produced just $1 million in revenues over the past year. Ariad boosters think that the company could be profitable in two years and that the stock could then trade for $10 to $12, up from a recent price of $4.