Reams of Underpriced Stocks

 | Dec 01, 2011 | 3:24 PM EST
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I have no idea if Wednesday's rally marks a significant bottom in the stock market. I have heard different pundits declare a long term-bottom, while others think it's just another case of kicking the can down the road in Europe. Looking at the data for a clue is confusing at best. The ADP employment report was good, but jobless claims still rose. Black Friday sales were strong but many, including me, believe a lot of holiday demand had simply been bought forward.

The coordinated action by the world's central banks gave Europe a sigh of relief, but it's also a sign that the crisis was worse than many had thought. We learned in 2009 that liquidity trumps all, and that could be the case once again. It took several moves by the Federal Reserve to get the party started, but it was quite the event once it finally happened. Should more liquidity measures be implemented in Europe, the same sort of a reactive move could result.

What I do know, based on the historical evidence, is this: If the market is at or near a bottom, that fact should lead the way and offer impressive returns for investors and traders alike. In the past, stocks in the Value Line research survey universe priced at less than $10, and awarded one of the two highest rankings possible, have outperformed the broad indices when coming off a significant bottom. These stocks tend to be companies that have fallen on hard times but are, as the ranking indicate, starting to see a turnaround in sales and earnings take hold. Over the past 25 years, this mechanical approach to stock-picking has been very volatile, but also very successful.

When I look at the list of stocks right now, I see there are more stocks than usual with the highest possible ranking. There seem to be a lot of names languishing below $10 while their fundamentals are improving, unnoticed by Wall Street. When these stocks hit the screen of the Street, they could become rocket stocks rather quickly. One company that has been on the list as a low priced top ranked stock for over a year now is BGC Partners (BGCP). So far this year, the interdealer broker has seen decent earnings gains from equity, derivatives and foreign exchange trading. The company pays a huge dividend, yielding more than 11% at today's price, and has plans to increase the payout and to buy back stock, as well. This company could actually prosper from increased volatility, as it has a large and growing presence in interest-rate-derivative markets.

One recent addition to the highest-ranked low-priced list is a stock I have owned more times than I can count over my career. On its face, Cincinnati Bell (CBB) is not exactly an exciting business. More than half of the company's revenues come from the old boring wireline phone business in the Cincinnati and Dayton areas of Ohio. Another 20% or so comes from wireless service in those markets.

The potential growth story with this company comes from the data center colocation business. This segment of the company allows companies to outsource their information-technology equipment in a central location, and the segment is growing quickly. The company is adding locations and has recently opened a facility in London as the business continues to expand. Investing cash flow from the old wireline and wireless businesses into data centers -- a growth business -- could make Cincinnati Bell a growth stock once again when the economy and corporate spending pick up.

For year-ahead performance, the other low-priced stocks with Value Line's highest ranking are Brightpoint (CELL), Cambrex (CBM), Celestica (CLS), Cost Plus (CPWM), Hawaiian Holdings (HA), Health Management Associates (HMA), Interpublic (IPG), Photronics (LAB), Select Medical (SEM) and Xerox (XRX). I do not have space here to go into detail on all of them, but if you believe the market is or near a bottom, it will be well worth your while to investigate these stocks further. They all have the type of growth and performance characteristics that have delivered significant outperformce in the past. Some, such as those outlined here, I believe you can own regardless of market conditions, as the fundamentals and growth prospects are very attractive from a long-term perspective.

On Friday I'll look at the low-priced stocks that have been granted the second-highest ranking by this respected research service.

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