'Cheap Losers' On Course to Be Winners - Barron's

by: Rachael Granby

For investors who haven't cashed out of the stock market, many are likely turning to brand-name businesses with strong balance sheets. Stocks like Microsoft (NASDAQ:MSFT) and ExxonMobil (NYSE:XOM) have fallen less than the indices, but this relative stability means these stocks aren't likely to be big performers during a market recovery. For those ready to call a market bottom, Barron's Bill Alpert looks at eleven stocks which could bounce quickly in an upturn.

Joe Mezrich, of Nomura Securities International, coined the term "cheap losers" for stocks selling at a cheap price-to-book-value ratio and a recently depressed stock price. In the four bear markets since 1974, cheap losers far outpaced S&P 500 gains during the ensuing recoveries. From the July 2002 market bottom, the S&P rose 17% while cheap losers gained 54%. In today's market, many value stocks have taken their worst hits in decades, but this may mean a bunch of stocks that have become cheap losers are approaching the limit of their downward slide.

Many of today's cheap losers are financials, but those have been omitted from this list for fear their book values may not be what they seem. The list also excludes companies whose assets are largely intangible or whose working capital is mostly inventory they could be forced to sell cheaply in a recession.

Affymetrix (NASDAQ:AFFX) and Cadence Design Systems (NASDAQ:CDNS), providers of essential technology tools, have both seen their stocks slide as end users cut back on spending. Cadence has seen further turmoil as its CEO and four other execs left the company this week after a failed bid for a rival company and an unwise sales plan. Still, Cadence is an entrenched leader and could do very well with a management turnaround and a recovery in the chip industry. Affymetrix is cutting costs after it missed its recent sales forecasts, the second such miss. But Affymetrix pioneered the "gene chips" used by doctors, and its shares offer a cheap bet on the adoption of these chips by doctors trying to determine the best drug to use for a patient's cancer.

Brooks Automation (NASDAQ:BRKS), a semiconductor-factory supplier, and Spherion (NYSE:SFN), a white-collar staffing company, are both restructuring to better position themselves in their industries. Briggs & Stratton (NYSE:BGG), the small-engine maker, is relocating manufacturing to China to widen its profit margins.

Penford's (NASDAQ:PENX) industrial-starch factory is coming back on line only now after June floods. Griffon Corp. (NYSE:GFF) supplies garage doors, aircraft electronics and plastic film, and its stock has received attention from Goldman Sachs and Barron's Roundtable.