The Single-Digit Comeback Kids

 | Dec 11, 2013 | 12:51 PM EST
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When we look back at 2013, we will be able to celebrate many terrific returns in the stock market. But none more noteworthy than the return of the single-digit stocks.

We've had so many Lazarus stories this year that it's almost too difficult to count. My three favorites though are Rite Aid (RAD), Alcatel-Lucent (ALU) and Nokia (NOK), because these three were truly written off for dead coming into the year.

Think about these gains. Rite Aid's gone up 312%. Alcatel-Lucent's rallied 244% and Nokia's gone up 98%. Those are year-makers and a total testament to the importance of staying open minded for even the most faltering of stocks and companies.

First, let me say that, unlike everyone else I know in this business, I am totally in favor of speculation. Under my regime, you can put as much as 20% of your Mad Money portfolio -- not retirement, too risky -- into specs. They allow you to stay engaged and can give you spectacular returns if you pick the right companies, the ones that have changed managements, changed cultures and fixed balance sheets (the recipe for success).

Second, this has been an entirely unusual year because you even made money with companies that didn't meet that tripartite test of management, culture and balance sheet. The stub common stocks for Fannie Mae, Freddie Mac and American Airlines, for example, all made you excellent money in 2013, even as Congress pretty much told you that the stocks from the government-sponsored enterprises were worthless and American is the very rare instance of a company reorganizing successfully in bankruptcy and then getting bought by an entity, US Airways, that created tremendous synergies and success instantaneously. Unlike the stocks of Fannie and Freddie, which I don't trust, I think the surviving entity of American and US Airways, the new American Airlines Group (AAL), is fantastic and, once again, it is ripping. I expect it to be terrific in 2014.

Third, let's be very clear, the vast majority of single-digit stocks have never come back before. They have been total jokes, the punch lines to why retail investors often lose money in the stock market.

Which brings me to Rite Aid, Alcatel Lucent and Nokia. All three of these companies had very challenged balance sheets coming into the year and had been victims of defeatist cultures, the first because of powerful competitors CVS (CVS) and Walgreen's (WAG) and the second because of the one-time dominance of Cisco (CSCO).

Rite Aid changed up managements, got much better merchandise, embraced private-label high-margin items in an aggressive way and used ultra-low rates to refinance its balance sheet. It's now a real competitor to CVS and Walgreen's and I think it can go higher.

Nokia and Alcatel-Lucent also availed themselves of cheap financing. Alcatel-Lucent took some tough medicine, cutting jobs to the bone while getting that balance sheet fixed. Nokia got out the handset business and became a fabulous play on network infrastructure. Both companies are winning business back that used to go to Cisco as a matter of course.

Yep, it wasn't supposed to be this way. These stocks weren't supposed to come back. But they have, in spectacular fashion. The best news? While the percentage gains have been monster so far, 2014 should be a darned good year, too.

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