4 stocks to buy on US downgrade

Pervasive pessimism calls for the brave to consider purchasing shares that have been punished too harshly.

By TheStreet Staff Aug 8, 2011 11:04AM

thestreetBy Chris Stuart, TheStreet

 

Standard & Poor's downgraded America's triple-A credit rating for the first time Friday, almost $1 trillion was wiped off the benchmark S&P 500 Index ($INX), and a key jobs report confirmed the economy is limp.

 

With stocks having strongly rebounded from their March 2009 lows and the Federal Reserve predicting accelerating economic growth in the second half of this year, expectations had been high just a few months ago. Instead, stocks are now down more than 10% from this year's peak -- producing the first correction in more than two years -- throttled by Thursday's 500-point-plus nose dive in the Dow Jones Industrial Average ($INDU) that did as much emotional damage as financial.

 

Sure, the news is grim. But it would be foolhardy not to take a step back and see if there are any opportunities in the stock market. And even though confidence in Fed chief Ben Bernanke, President Barack Obama and Congress is shaken, chief market strategists at 13 big banks forecast the S&P 500 will rise 17% through Dec. 31, the average estimate in a Bloomberg survey taken Friday.

 

So let's step away from the scary R-word -- recession -- for a minute and assess the damage that has been done. I screened stocks over the past 10 days that have fallen more than 10% and may have been unfairly punished. Here are at least four companies that are worth another look:

 

1. Royal Caribbean Cruises (RCL)

 

The cruise operator's stock is down 25% over the past 10 days and fell 14% last week after the company lowered its 2011 guidance by about 20 cents to a range of $2.85 to $2.95.

 

Royal Caribbean blamed the shortfall on lower expectations for Eastern Mediterranean sailings and an interest expense revision.

 

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At the midrange of guidance, the stock is now trading at just 9.3 times earnings, much lower than the five-year average of 17 times earnings. Sure, if we double dip and fall into another recession, the company will likely face tough times. But at these levels, I would consider it a low-risk, high-reward investment.

 

2. Rent-A-Center (RCII)

 

The rent-to-own operator has fallen 21% over the past 10 days. The stock was downgraded last week by Stifel Nicolaus after the company missed expectations and lowered guidance. Management expects $2.85 to $3 a share in earnings, on $2.87 billion to $2.91 billion in revenue. Previously, executives forecast $2.90 to $3.10 a share.

 

At the midrange of guidance, the stock is now trading at only 8.3 times earnings, much lower than competitor Aaron's (AAN), which trades for 14 times earnings. Aaron's has outperformed Rent-A-Center, but with the recent drop in price, Rent-A-Center looks attractive. And if the economy continues to deteriorate, this is the kind of company that's recession-resilient.

 

 3. Akamai (AKAM)

 

This once-darling of Wall Street has become a scapegoat of sorts, due to lower-than-expected results over the past several quarters. In the most recent quarterly report last week, Akamai annouced in-line profit and revenue, but offered third-quarter guidance that was below analysts' estimates. The stock is down 22% over the past 10 days.

 

While growth for the Internet-content-delivery company has slowed, it looks like the selloff may be overdone. Trading at 13 times forward earnings, and with growth still in the 15% to 20% range, Akamai might be worth a flyer at these levels.

The stock also has a pristine balance sheet, with nearly $500 million in cash on the books.

 

4. Vistaprint (VPRT)

 

The stock was nearly halved last week after the company announced that internal investments would significantly hurt results. Over the past two weeks, the stock is down 39%.

 

The online-printing company outlined a five-year plan that management believes will allow it to grow organically to $2 billion or more in annual revenue and annual earnings of a $5 a share by fiscal 2016.

While the guidance was disappointing and future quarters may be restrained by investments in future growth, I believe this is a company that can be expected to grow at 20% to 25% over the next several years. Vistaprint also has a solid balance sheet, with nearly $5.50 per share in cash. Consider this a longer-term high-risk, high-return investment.

 

Other stocks that have declined massively over the past two weeks that might deserve another look: CBS (CBS), down 17%; Guess? (GES), down 18%; Morgan Stanley (MS), down 19%; and Best Buy (BBY), down 16%.

 

See anything that I missed? Taking advantage of the stock-market downturn? Feel free to comment and let me know what stocks you're looking at.

 

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