3 Nicely Priced Stocks

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 |  Includes: AMSC, ERT, JBLU
by: StreetAuthority

By David Sterman

In the market's remarkable run-up in the past two years that saw the major averages roughly double from the March 2009 lows, an increasing number of investors have looked to take profits in some of their best picks. As a result, some of these stocks have lost their momentum and have pulled back from recent peaks.

Here are three names I've been watching that are now quite nicely priced.

1. JetBlue (NASDAQ:JBLU)

It's been quite a while since anyone called this low-cost airline a "growth story." Sales growth has been steadily decelerating from about 40% in 2006 to about 15% in 2010. But maturity has its benefits. Management has slowly learned how to squeeze more profits out of each customer by optimizing its route map, charging extra for certain seats and tightening requirements for its frequent-flyer program. That's why EBITDA growth has exceeded 10% for four of the past five years and may actually accelerate in 2011 and 2012.

The rising EBITDA is likely to come from a factor beyond management's control. Many airlines are starting to push through a series of strong fare hikes as demand for air travel is showing no signs of slowing. Of course, the recent spike in fuel prices doesn't help, but the fare hikes are more than off-setting any cost pressures. This creates a sweet spot for JetBlue, which was originally launched more than a decade ago to build market share through low-cost pricing. When the major carriers radically cut fares in recent years, JetBlue lost its pricing edge. But with fares on the rise, JetBlue is likely to keep boosting its own fares -- albeit at a more moderate pace -- to fatten profits while still staying below pricing levels of rivals.

A bullish outlook for 2011 helped propel shares north of $7 in early 2011. Shares have subsequently slipped nearly 20% on only "so-so" fourth-quarter results. Profits missed forecasts thanks to lousy weather at the carrier's New York and Boston hubs. Weather in the first quarter has been more obliging, yet many in the U.S. Northeast (myself included) badly needed a break from the brutal stretch of cold and snow. That's been a real positive for JetBlue in recent weeks, as the carrier has beefed up its route structure to Florida and the Caribbean and is said to be seeing strong demand.

Prior to that upturn in traffic, analysts had recently downgraded their expectations from a small first-quarter profit to a small first-quarter loss. Yet their initial view of profits (instead of losses) will indeed likely be the case, and I expect JetBlue to handily top consensus forecasts after missing the consensus in the last two quarters. That same logic extends over the full year. The steady rate hikes I mentioned earlier have not been incorporated into analysts' models. JetBlue has the choice of holding fares steady and filling more seats, or joining peers with hikes. Recent fare surges imply a middle-ground approach -- moderate fare hikes that will still lead to fuller planes.

As that plays out, investors may again notice that shares are quite reasonable in relation to earnings. Per-share profits are expected to grow 30% in 2011 and 2012, and the stock is currently worth just 10 times projected 2012 profits. As the economic rebound continues, shares could rise from a recent $5.75 to the $8 mark by year's end. That's a potential 40% gain.

2. eResearch (ERES)

I told you about eResearch, which helps drug developers ensure their promising drugs have solid safety profiles, last May.

Shares moved up from $7.50 to an eventual $9 later in the summer, but are now back down below $6.50. I think investors have just been given a second chance to get in on this promising growth story.

The acquisition of CareFusion's (NYSE:CFN) respiratory monitoring services is helping to boost sales at an 80% clip right now. Organic growth is likely cool to about 15% by the third quarter once the deal will have been in place for a full year. Yet management is only now starting to reap the bottom-line gains from the deal, such as cross-selling synergies and the elimination of redundant overhead. So profit growth should be robust even as the top-line cools.

I look for the company to boost EPS (earnings per share) more than 50% this year to about $0.55, and another 25% in 2012 to about $0.70. Shares trade for just nine times my admittedly bullish 2012 view -- a nice re-entry point for those that missed the last upward move. A multiple of 12 to 14 times 2012 profits looks feasible once management proves the earnings power of this business model -- that implies a stock move up to the $8.50 to $10 range from a recent $6.30 (a 35-59% gain).

3. American Superconductor (NASDAQ:AMSC)

This maker of wind turbines, wind power gearing and other energy products has settled into a clear trading range. Since the summer of 2009, shares routinely find a floor around $25 and then bounce up into the mid $30s -- or higher -- only to sink back into the mid $20s again. That's where the stock is now, though the company appears poised to continue delivering impressive growth. Sales growth is likely to keep exceeding 25% through at least fiscal (March) 2013, based on current backlog.

I profiled American Superconductor nearly a year ago, and what I wrote then still applies. The company has a key blue-chip customer -- China's Sinovel -- which shows no signs of slowing down, and other key customers are signing up as well. Right now, clean energy stocks are out of favor, but this name always zooms ahead when investors rotate back into this group. I see a quick move back to $35 when that happens.

Good companies on sale -- that's what I'm always looking for. These three companies have robust growth prospects and now have more appealing valuations. Any one of them would make a nice potential addition at current prices.

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

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