Identifying Future Leaders

 | Dec 02, 2011 | 1:30 PM EST  | Comments
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Stock quotes in this article:

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Today I want to look at the stocks in the Value Line Universe that are low priced and have the second highest ranking for year-ahead performance. These stocks, along with the highest-ranked, low-priced stocks, have historically done very well and have been explosive after a market bottom.

I have no clue if the recent action is indeed a market bottom in the wake of coordinated central bank intervention. I do know that unless we enter a bear market, these stocks have the characteristics that should outperform the broader markets. Stocks that are trading below $10 with improving fundamentals often become market leaders when the large institutions begin to notice the turnaround.

When I look at the list, I see that two of my problem child stocks from my 2011 picks are on here. LeapFrog (LF) has finally reversed that losses for the year and is just about back to even. The company is rolling out new educational toys for the holiday season and I noticed last night that the aisles at Target (TGT) were well stocked with LeapFrog offerings. The Leap Pad Explorer tablet is being described as one of the hot toys this year and that should bode well for the stock price in the next few quarters. It seems that the company is finally turning the corner. With sales and profits improving and the stock flirting with new highs, this turnaround could easily turn into a momentum stock in the near future.

LodgeNet Entertainment (LNET) has not done as well. In spite of just reporting its first quarterly profit in more than three years, the stock is still a dog. The company continues to diversify away from hotel in-room movies and just recently installed its Interactive Patient system in Cedars-Sinai Hospital in Los Angeles. The company is also in the early stage of upgrading its hotel service to its HD Interactive service -- that should also bolster the top line next year. At least one very smart investor likes the company's potential: Mark Cuban has been buying stock and now owns 9.5% of the company. The stock has recovered off of its lows but it is still trading about 40% lower for the year.

Energy Solutions (ES) in an intriguing stock that was just upgraded to the penultimate ranking by the service last week. The nuclear services company has seen its U.S. business, especially to the federal government, decline as stimulus funds have dried up, but its prospects overseas are much better. The Zion decommissioning has been the strong point in domestic business, as revenue continues to grow from that project. Overseas Energy Solutions is seeing strong revenues from construction projects in Asia and plant decommissioning activities in the U.K. The company is hoping to see additional business from Japan, as the aftermath from the nuclear disaster in that country may lead to the decommissioning of older plants. At some point, nuclear power will become a larger part of the energy discussion both in the U.S. and globally, and this company could become a growth stock at some point in the next few years.

Retails stores are also well represented on the list right now. Charming Shoppes (CHRS), which recently announced that it was selling its Fashion Bug stores and considering options for the future, makes the cut. Hopefully, the strategic review will conclude that the chain needs to be sold. Supermarket chain SuperValue (SVU) is also a low-priced, highly ranked stock by the research service. The company has struggled in the weak economy but is on track to see revenues and profits improve next year. Since it is not large enough to compete with the larger chains, this company would also benefit from a strategic or financial transaction. Two recent picks, West Marine (WMAR) and Office Max (OMX) also make the list of potential turnaround and momentum winners.

The Value Line stocks with the two highest rankings that are trading below $10 have outperformed for a long period of time. Although they are quite volatile, they have really shined after important market lows. Although there are too many stocks to list them all here, I will be happy to email the entire ticker list of 30 stocks to anyone who requests it. Just email me at Tim.Melvin@thestreet.com.

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