Stocks Back from the Dead

published 25 August 2009

Every so often there's a strange-but-true story about a corpse that twitches just before it's to be shipped to the morgue. This can also happen with investments. But when you see such a phenomenon in the world of stocks, you're not having a nightmare. In fact, you're witnessing an opportunity to, er, make a killing.

A bunch of stocks have risen from the grave this year. Heavyweights such as Bank of America and General Electric, both members of the Dow Jones industrial average, as well as many homebuilders, retailers and manufacturers, have not only cheated death but have seen huge run-ups in their share prices since the stock market bottomed last March. Many dropped to the single digits and terrorized their shareholders with losses of 80% or more from their peaks of the past several years before reversing course.

If you're a bottom fisher, you may have already profited from this ghoulish action. But most of us aren't gutsy enough to risk precious savings on a stock that's falling toward zero. The question you should be asking yourself now is whether a share of something such as specialty-vehicle maker Oshkosh (symbol OSK) -- which traded at $66 in 2007, fell below $4 in late 2008 and closed at $26.62 on August 24 -- has already overshot reasonable value, given the company's and the economy's prospects. If it has, it's foolish to buy more shares no matter how far the price is below the prior peak.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

All of the ten stocks below fit the Oshkosh pattern. Some are worth considering and some you should avoid, but this much is for sure: At least ten times as many stocks are also back from the dead. Our judgments are based on the assumption that the recession is over but that the recovery will be restrained by high unemployment, continuing retrenchment on the part of debt-laden consumers and the possibility of higher long-term interest rates over the coming year.

Aegon, a Netherlands-based life insurer and pension manager, just raised 1 billion euros in a stock offering priced at the equivalent of $7.50 a share. Like many financial companies, Aegon has lost money for four straight quarters, and Standard & Poor's says it is still an "unstable entity with a great ability to surprise" in a bad way. But the company is trying to become less reliant on the U.S. and the U.K., and it has moved into faster-growing markets, such as India and Mexico. This makes Aegon sort of a back-door emerging-markets play. It was a steal at less than $3; at the current price, it's still worth a shot despite the absence (for now) of earnings and dividends.

Warren Buffett recently sold three million of the 12 million CarMax shares Berkshire Hathaway had owned, but don't let that deter you; Buffett's been wrong as often as he's been right lately. Shares of CarMax, which mostly sells used vehicles, collapsed because of concerns that neither it nor its customers could get adequate financing; in fact, CarMax's captive finance operation swung from a profit to a loss in early 2009.

This commercial real estate broker and property manager is an aggressive alternative to investing in real estate investment trusts. With Ellis, you forgo dividends for a shot at high growth. CBRE has what's known as earnings leverage. If the price and demand for office space, warehouses and financial back-office facilities come roaring back -- as commercial realty did in the middle years of this decade -- CBRE, which carries a lot of debt, should do especially well.

That homebuilder stocks shone during the current rally should come as no surprise. The stocks had been priced not just for a recession but for catastrophe. If this turns out to be a V-shaped economic recovery, the 200-plus% gain in Horton's shares might be not only defensible, but too little. Given the likelihood of a sluggish economic rebound, however, the advance in the shares of this national homebuilder more than offsets the earlier plunge.

From November's low, this is already a six-bagger, so there's reason to be concerned that the stock has rebounded too fast, too far. Then again, Oshkosh just completed a secondary stock offering for $25 a share -- pretty amazing for a company whose stocks and bonds were crashing six short months ago. All's well now with the credit folks, too. The question is whether Oshkosh's civilian businesses, such as garbage trucks and fire engines, will improve as the economy does. Unless they do, the stock is no longer enough of a bargain to warrant a buy.

The seller of upscale kitchen tchotchkes and other home furnishings is a better company than most specialty-store operators, although all retail stocks are somewhat speculative nowadays. It carries little debt, pays a safe dividend, and has fair sales trends and weak competition. If spending ever resumes on the kind of stuff you see at Pottery Barn, one of the company's concepts, the stock can keep up the momentum. Wait for the earnings report due out August 26 for confirmation, though. If there are any shocks, wait for the stock to take the usual two-day pounding. Then buy.

Topics

Stock Watch Markets

Kosnett is the editor of Kiplinger's Investing for Income and writes the "Cash in Hand" column for Kiplinger's Personal Finance. He is an income-investing expert who covers bonds, real estate investment trusts, oil and gas income deals, dividend stocks and anything else that pays interest and dividends. He joined Kiplinger in 1981 after six years in newspapers, including the Baltimore Sun. He is a 1976 journalism graduate from the Medill School at Northwestern University and completed an executive program at the Carnegie-Mellon University business school in 1978.