Neglect Creates Opportunity

 | Dec 04, 2013 | 12:00 PM EST  | Comments
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On Tuesday, I wrote a column about some of best performing stocks so far in 2013. The names were companies familiar to most -- Fannie Mae (FNMA), Freddie Mac (FMCC), AMR Corp. (AMR) -- but not necessarily for the most positive of reasons. These three companies and the other on the list were widely viewed as worthless entities -- at least from an equity perspective.

But from Mr. Market's perspective, the underlying equities have traded as if they were anything but worthless. For example, high profile investors Bruce Berkowitz and Bill Ackman have taken huge stakes in Fannie and Freddie.

Looking to 2014, there are still some familiar names who remain disregarded by the equity market. Again, these are names that are, or at one point in time were, very familiar businesses. Perhaps 2014 is the year when the dust comes off and Mr. Market likes what he sees lying underneath.

RadioShack (RSH) is one such name. As a niche electronics retailer, Radio Shack has been brutalized by the innovative forces of the economy, including big box names such as Wal-Mart (WMT) and Best Buy (BBY) and of course, the Internet. Shares trade for $3 today, adn the stock has a market cap of less than $300 million. The balance sheet is healthy and the company is generating $3 billion to $4 billion in sales on annualized basis. The company recently secured an $800 million asset based lending facility with GE Capital.

Even though shares of both Fannie Mae and Freddie Mac are trading more than 700%, year-to-date, they could continue charging ahead in 2014. Don't expect a repeat of the 2013 performance, but Bill Ackman certainly feels there is substantially more upside to be captured from these companies.

McDermott International (MDR) is a $1.8 billion engineering and construction firm serving the oil and gas industry. The company has nearly $200 million in net cash on the balance sheet. Business has deteriorated over the past several quarters but a new chairman was appointed last month. The company also recently announced a couple of positive contract wins.

The shares were recently trading for $7.79 -- two years ago they were at $25. The unleveraged balance sheet is the key factor -- most energy related companies that go under almost always do so because of leverage. McDermott has none and seems to be making up for lost revenue with new contracts.

ACCO Brands (ACCO) is also worth consideration. This maker and distributor of office and school supplies has experienced a couple of lackluster years. The stock price of $6.60 values the company at $680 million, although net debt stands at $1 billion. The company does generate healthy levels of free cash flow and net income last year was $115 million.

With the market in such an optimistic state today, very few investors will "waste" their time looking at the neglected shares of beaten-down companies because they are not moving up with the tide. It's that neglect that creates the opportunity.

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