3 beaten-down giants ready to rebound

The market has been on the defensive since May, leaving a value hunter's paradise for these stumbled stocks.

By TheStreet Staff Sep 27, 2011 11:53AM

Image: Stock rebound (© Adam Gault/OJO Images/Getty Images)By Robert Walberg, TheStreetTheStreet


Buying stocks is as much about timing as it is about research. It's important to do your homework and find stocks that meet your investment criteria, but even then you might be in for tough times if you don't pay at least some attention to timing.

Psychology plays a critical role in determining a stock's price, and if you like to buy stocks at a good value, as I do, then you want to make sure to spend considerable energy on ascertaining a proper entry point.


Most of us have heard the phrase "Don't try to catch a falling knife." In other words, if you buy stocks that are falling, you might get cut and bleed out before the stock bottoms and starts to go back up again.


Here's the problem for value investors: Opportunities generally arise from the fact that the stocks we are interested in are out of favor. They are losers for one reason or another. So we want to find stocks that are out of favor but not likely to keep falling -- or at least not much further.


That's the key to playing the value game successfully. If your timing is wrong, you might find a great company that has temporarily fallen out of favor and therefore seems like a good buy. However, if the stock goes down 20% to 25% more, you're probably going to get washed out before the turnaround takes place and the real money is made.


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So with the market having been on the defensive since May, there are a number of stocks trading well off their 52-week highs. It's a value hunter's paradise -- if you are patient and if you find stocks in which the selling is largely exhausted.


I've identified three such bargains that I want to share with you now. Mind you, all of these stocks are down big from their highs and are not the names that most market commentators are rallying behind. But for investors interested in making serious money over the next 12-18 months, these beaten-down giants have great potential.


My favorite dog right now is Best Buy (BBY). This big-box retailer is trading at 0.18 times sales -- a huge discount to its peers and the market. Normally when you see a price-to-sales ratio this low, it means investors are pricing the stock for bankruptcy. Now, BBY has had its troubles, but bankruptcy is not in its future. Management is rethinking the game plan and is focusing on downsizing stores and rethinking its pricing strategy.


While this isn't likely to be a banner holiday season, because of the lack of must-have products, the same-store sales comps are easy and expectations are so low that even a mild upside surprise could trigger a nice recovery rally. With the sellers washed out, downside risk from here is minimal, and with even modest success this stock could easily be up by more than 50% over the next 12 months.


Hewlett Packard (HPQ) is another stock everyone loves to hate right now, but this is a great franchise selling at a steep discount to the market and its peers. While the jury is still out on the decision to name Meg Whitman as the new CEO, I think it was an inspired choice.


This is a situation that will take time to unfold, but the balance sheet is relatively strong, and the valuations are so cheap, that with a new management team I'm willing to bet the stock's potential gains from here far outweigh the downside. I would be a buyer with an 18-month target of 40%-60% growth.


Finally, I think the worries of a global recession are being overstated at the moment, so the opportunity to buy Caterpillar (CAT) at about 8 times estimated earnings and 35% off its recent high is just too good to pass up.


If the economy falls into a deep recession, this pick would probably prove to be a bad one, but I don't see much chance of that at this point, and the recent selling has already discounted a mild recession.

Again, the downside risk from here seems limited. Conversely, if the numbers prove better than expected, this sector leader will quickly move back to its highs. Meanwhile, you get to collect a nice little dividend of 2.4%. Not bad.


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