5 Possible Picks in a Tumultuous Market

by: Chris Fernandez

The tumultuous market has continued to beat down stocks of all shapes and sizes.

This is great news for those of us waiting on the sidelines to put new capital to work.

This month I have a broad range of stocks that I am looking at for possible inclusion into the PeakStocks.com portfolio.

These stocks enter and exit my Top 5 as constant fluctuations in both price, market conditions, and business fundamentals constantly alter the investment thesis.

Today I wanted to give you a heads up on some of the stocks that I was watching for possible inclusion in my portfolio, specifically ones that are high on my list, and most likely to be added as formal recommendations in the weeks to come as they reach desirable price points, and present wonderful opportunities for long term investors.

Please note that my Top 5 Stocks for October aren’t yet formal recommendations.

I have more due diligence that I have to perform on them, but they are compelling enough with the research that I have done to be at the absolute top of my list, at least as of this writing..

Let’s Start With What We Know

My top picks from my own portfolio

Before we get into the new names that are on my list, let’s first take a look at the names in my portfolio, and how I feel about them:

AAR LogoAAR Corp. (NYSE: AIR): AAR Corp. is a diversified company that provides products and services to the aviation, aerospace, and defense industries worldwide. It operates in four segments: Aviation Supply Chain; Maintenance, Repair, and Overhaul (NYSE:MRO); Structures and Systems; and Aircraft Sales and Leasing.

AAR has gotten slammed to the mat along with most other stocks in the Aerospace and Defense sector over the last year or so.

But as I wrote recently, AAR is being unfairly punished for what is going on around it, and is still executing extremely well even within this difficult environment with higher oil prices, and cut-backs in the airline industry.

You can read my full analysis on the company’s fantastic last quarter results here.

Needles to say, even in today’s environment in the Defense and Aerospace industry, AAR’s valuation is extremely attractive.

In fact, AAR is approaching its book value of about $15.56 per share!

Couple that with recent insider buying of the company stock, and you can see that we might be approaching a bottom here.

Those with a long term investment horizon would do well to visit the AAR story, and start a position here as AAR is a best-in-breed company that will be one of the first to rise in price when strength returns to this battered sector.

New to the AAR story?

  • Read my last company update here.
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GeoEye LogoGeoEye Inc. (NASDAQ: GEOY): GeoEye is a leading provider of global space-based and aerial imagery and geospatial information.

GeoEye’s imagery is used in a broad array of applications that include: government monitoring and surveillance, intelligence gathering, construction planning, scientific research such as environmental monitoring, and the online mapping industry via Google (NASDAQ: GOOG), Yahoo! (NASDAQ: YHOO), Microsoft (NASDAQ: MSFT) and other partners.

GeoEye is a slight notch below AAR in my recommendation list merely because it has already appreciated about 50% from its lows this summer of about $16.00 per share to its current level of $24 per share.

That being said, I still feel that we have just gotten started with GeoEye, and that now, especially after the recent successful launch and check-out of GeoEye-1 on September 6th, GeoEye’s year-over-year comparisons will make the stock look ridiculously cheap, which it is.

Now that GeoEye-1 is launched and all but up-and-running, GeoEye is the best company in the commercial imagery space when compared to its rival DigitalGlobe (NYSE: DGI).

If you’ve got new money to invest, GeoEye is my #1-B recommendation.

New to the GeoEye story?

  • Read my initial buy recommendation here.
  • or listen to my EXCLUSIVE interview with GeoEye’s management team here.
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uWink logo

uWink Inc. (Nasdaq: UWKI.OB): uWink, Inc. is an entertainment and hospitality software development company that develops casual, interactive, social games, in addition to licensing the rights to those games and their proprietary touch-screen ordering and gaming interface to restaurants, entertainment venues and the hospitality industry.

uWink also owns and operates three restaurants under the uWink brand name that utilize this technology.

The company’s CEO is Nolan Bushnell, the founder of Atari Inc. (OTC: ATAR.PK) and Chuck E. Cheese (NYSE: CEC), and what uWink is doing with their proprietary software should lead them to a huge market in a few year’s time.

uWink just announced a big deal to test out their touch screen terminals in a Chili’s Too Margarita Bar owned and operated by Delaware North, a global hospitality, food service and retail provider, at the Fort Lauderdale Hollywood International airport.

What is significant about this deal is what it portends for uWink, especially in light of the fact that if this pilot program goes well, you might be seeing these terminals in not only more Chili’s restaurants owned by Brinker International (NYSE: EAT), but also other restaurants and businesses within the hospitality industry that are also owned and operated by Delaware North, and other companies.

You can read all about this breakthrough deal here.

I think uWink, while a risky stock, is a great investment for new money, or for additional money if you already own shares, especially at today’s prices.

New to the uWink story?

  • Read my last company update here.
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AuthenTec LogoAuthenTec (NASDAQ: AUTH): AuthenTec is the worlds leading provider of fingerprint sensors and solutions to the wireless, PC and Access Control Markets.

If you’ve been following my picks lately, it will come as no shock that AuthenTec is hurting as a result of a significant customer loss, that will severely impact 2009 sales and earnings, and raises serious questions as to whether or not AuthenTec can even sustain themselves as an ongoing company.

You can read all about AuthenTec’s last company update and conference call about these issues here.

With shares trading at around $2.00 per share as of this writing, the downside is limited as a result of AuthenTec having $2.14 per share in cash, and a book value of about $2.58 per share.

With a market cap of only $55 million, and having $60 million in cash on their balance sheet with no debt, the stock is currently trading below cash value!

I do not recommend purchase of shares in AuthenTec for those that are risk averse, and for only those who can stomach further losses, or are playing this stock for the bounce back that will surely come because the valuation is approaching ridiculous levels.

For AuthenTec’s intellectual property alone, there is value in the shares of the company, and I would not be surprised to see AuthenTec bought out by a larger player within the next 6-12 months because of their dirt cheap valuation, and the assets that they do possess.

If you own shares of AuthenTec, now is not the time to sell. There is some value here that is not currently priced into the shares of the stock.

If you don’t own shares, tread lightly, and at your own risk.

New to the AuthenTec story?

  • Read my last company update here.
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Top 5 Stocks for October

The following stocks are not formal recommendations, but are the highest on my watch list right now.

They are listed in no particular order.

  • PROS Holdings, Inc. (NYSE: PRO): PROS Holdings, Inc. provides pricing and revenue optimization software to several different industries worldwide.

Did you ever wonder how airlines and other industries like hotels and cruise lines, can change prices on the fly so quickly to maximize profits and adjust to customer demand?

Well, PROS is one of companies that provides this service to many different companies in several industries all over the world.

PROS offers a set of integrated software products that enables enterprises to apply pricing science to determine, analyze, and execute optimal pricing strategies.

PROS sells and markets its software products primarily through its direct sales force to customers in manufacturing, distribution, services, hotel and cruise, and airline industries.

I love everything about this company, and have been watching them since their IPO last year.

The stock currently sits below it’s IPO price of $11 per share, and the company just instituted a share repurchase program for $15 million.

Although below IPO levels, I still feel that the stock needs to come in a little bit more, especially in light of a possible slowdown in IT spending and large scale integrations of new enterprise software.

This could be offset however, by company’s needs to maximize their pricing and margins in a tough economy and could lead to increased spending by some companies to upgrade their pricing services to maximize profits.

We’ll see how this plays out, but I think this company is a good one, even though it still might run into a little rough going here in the next few months.

Why I Like the Company: Wonderful high margin/cash flow business with recurring revenue streams; cutting edge and proven technology that is best-in-breed; great balance sheet and high insider ownership; while not “cheap” valuation has gotten more attractive.

  • eHealth, Inc. (NASDAQ: EHTH): eHealth, Inc. offers Internet-based insurance agency services to individuals, families, and small businesses primarily in the United States.

The company’s e-commerce platform, which is accessed directly via ehealth.com and ehealthinsurance.com, enable individuals and families to research, analyze, compare, and purchase health insurance products online.

The cool thing about eHealth is that the company offers various health insurance products, including medical health insurance coverage, such as preferred provider organization; health maintenance organization and indemnity plans; short-term medical insurance; student health insurance; health savings account eligible health insurance plans; and ancillary products, such as dental, vision, and life insurance.

The even better part is the eHealth doesn’t compete with anyone online! There is no other company that does what eHealth does.

Also, because of the fixed-cost nature of health insurance (there is no discounting online or otherwise in this highly regulated industry), eHealth is probably one of the only ways that most individuals will ever see what different health insurance offerings they could purchase from 175 different companies!

Most of the time you know a broker or call around to compare rates, or visit a couple of company’s websites, so in the end, you are only seeing a very small slice of what is out there.

For anyone that is self-employed, runs a small business, or as more and more companies stop paying for employee health insurance, need to purchase their own health insurance, it is becoming increasingly crucial that individuals find affordable health insurance and eHealth gives them the power of choice.

eHealth has barely scraped their potential in this market, and I have been watching them since their IPO late last year as their valuation has become much more reasonable.

Why I Like the Company: No other competition on the Internet; offers a wide variety of health insurance plans for any need in one convenient location; is changing the way people shop for health insurance; reasonable valuation; founder/CEO with about 5% of the company; high margin business with recurring revenues, and super high cash flow (currently $136 million in cash with NO debt, about $5.43 per share).

  • Chipotle Mexican Grill, Inc. (NYSE: CMG) (NYSE: CMGB): Chipotle Mexican Grill owns and operates 775 “fast-casual” Mexican restaurants and offers a focused menu of burritos, tacos, burrito bowls (a burrito without the tortilla) and salads made from fresh, high-quality raw ingredients, prepared using classic cooking methods and served in a distinctive atmosphere.

Chipotle adheres to what they call Food With Integrity (FWI), whereby Chipotle seeks better food not only from using fresh ingredients, but ingredients that are sustainably grown and naturally raised with respect for animals, the land, and the farmers who produce the food.

Chipotle’s ultimate goal is to be able to serve only organically raised and grown food in all their restaurants.

I have been watching Chipotle for quite some time, since its IPO actually, and recently wrote extensively about the company and the headwinds that they are facing with the economy and rising commodity prices.

You can read all about that here.

Needless to say, if/when the price is right, I will be looking to pull the trigger on this best-in-breed company, but as of right now, I feel that Chipotle has to endure a little more pain and a lower stock price before it will be safe to purchase shares.

Also remember to always purchase the “B” shares as they are exactly the same as the “A” shares but are anywhere from 5-15% cheaper and have 10 times the voting power.

Why I Like the Company: Best-in-breed player with significantly higher margins and a lower cost structure than other similar fast-casual restaurant chains; their commitment to organic and natural ingredients sets them apart in a crowded restaurant landscape; stock price is starting to become reasonable again after over a year of hype and overindulgence; company is still expanding at a breakneck speed, even in the face of deteriorating business fundamentals positioning themselves for a quick turnaround; same-store sales are still positive; company still churns out significant cash, and pays for its expansion via its own cash generation with almost no debt.

  • Rick’s Cabaret International, Inc. (NASDAQ: RICK): Rick’s Cabaret International, Inc., through its subsidiaries, operates upscale adult nightclubs serving primarily businessmen and professionals.

Rick’s nightclubs offer live adult entertainment, restaurant, and bar operations in Houston, Austin, San Antonio, Minneapolis, Minnesota, New York, Dallas Fort Worth, Charlotte, and other cities under the names Rick’s Cabaret, XTC, and Club Onyx.

Rick’s  also owns and operates adult entertainment Internet Web sites, including xxxPassword.com that features adult content; CouplesTouch.com, a personals site for those in the swinging lifestyle; and NaughtyBids.com, an online adult auction site that contains consumer-initiated auctions for items, such as adult videos, apparel, photo sets, adult paraphernalia, and other erotica.

As of September 30, 2007, Rick’s operated 15 adult nightclubs.

Now while this stock might not be for everyone, there’s no reason one cannot make money in any market regardless of what a company does.

If you can invest in dirty oil, coal and other such companies that are polluting our air, and causing havoc with our planet, or you can invest in cigarette or tobacco companies, then Rick’s is right up your alley.

I usually don’t invest in the former, but have no problem investing in Rick’s especially with it’s best-in-class operating structure, and by the mere fact that the adult entertainment industry is fragmented and Rick’s is one of the few companies that has put together an operational and company structure to consolidate more of these locations through intelligent acquisitions and operating efficiencies.

Further, Rick’s has fantastic margins, cash flow, and the CEO owns about 13% of the outstanding shares of the company.

A company like Rick’s would be a great way to diversify your holdings away from regular technology, commodity, or other names.

Rick’s share price has fallen from about $30 per share, to about $10 as of this writing, for no apparent good reason, aside from the fact that, recently anyway, most of its locations are in Texas and Houston, and have been hit by the recent hurricanes that might affect company results slightly in this quarter, and of course, by the mere fact that this company is a “sin” stock, and many funds and investors cannot, or will not buy shares.

I think this is a big mistake.

Why I Like the Company: Best-in-breed player that is significantly increasing its market share in a largely fragmented industry via intelligent acquisitions; dirt-cheap valuation as a result of a combination of events and negative market perception; CEO with a large stake in the company (13+%); increasing sales, profits, cash flow, and free cash flow; largely underfollowed stock.

  • BE Aerospace, Inc. (NASDAQ: BEAV): BE Aerospace, Inc. manufactures and markets cabin interior products for commercial aircraft and business jets worldwide and operates in a number of different segments.

One segment provides seat products, including seat frames, cushions, armrests, and tray tables; and optional features, such as adjustable lumbar supports, footrests, reading lights, head/neck supports, and oxygen masks.

Another segment provides coffee and beverage makers, water boilers, ovens, liquid containers, refrigeration equipment, oxygen delivery systems, and other interior components.

And finally, BE’s distribution segment distributes aerospace grade fasteners and provides inventory management and replenishment, electronic data interchange, packaging and bar-coding, quality assurance testing, and purchasing assistance.

The company serves commercial and business jet aircraft operators, and aircraft manufacturers.

Pretty much anything that needs to be done to, or can be bought for, the interior of an airplane, BE is, or can be involved with in some way.

As with all companies in the Aerospace and Defense sector, BE has been beaten down mercilessly in the last year or so, in addition to feeling pressure as a result of the Boeing (NYSE: BA) labor strike, and the possibility of delayed or canceled orders for the new aircraft that Boeing will be producing once the dispute is resolved.

I believe that we need to look further into the BE Aerospace story because I feel that the market has punished this company way too hard, and there will be a return to this sector soon enough.

As it stands, Boeing, and other airline manufacturers are going to have to start churning out better and more efficient aircraft as a result of oil price increases and heightened demand from carriers for more fuel efficient models.

Rest assured that these planes will be built, and as a result, orders and shipments will resume, and this sector will gain favor once the economy recovers, and order volume and flow tick up.

Even with these potential delays, BE is already poised to grow revenue over 30% this year, and over 25% next year with increases in earnings per share (NYSEARCA:EPS) of over 30% this year and 22% next year.

There might be other reasons why the company has been beaten down, so further diligence is required, but upon first inspection, I like what I see.

Why I Like the Company: Valuation levels below that of its peers; beaten down stock price and industry poised for a turnaround with some clarity on the Boeing situation as well as lower oil prices, and increased consumer and airline demand; steady business fundamentals in the face of this turmoil; top supplier in the aerospace and defense industry.

Bottom Line

While this is not a definitive and comprehensive list of every company that I watch and am interested in, these present the most compelling argument for inclusion sooner rather than later.

Once again, my Top 5 Picks for October are not formal recommendations, and after digging around, they may never become formal recommendations, but this will give you a heads up if you are looking for some interesting companies to get started researching on your own, or that you might be hearing about soon.