Although the major indexes have moved steadily higher during
the past six months, a few dozen companies have missed the
Of the 1,500stocks in the S&P 400, 500 and 600, 33 slid
more than 30% during the past six months. A 35% slump in
Apple (Nasdaq: AAPL)
probably qualifies as the biggest plunge that no one saw coming,
but many other stocks have blindsided investors as well.
The trouble with these big "losers" is that they quickly get
kicked off of most investors' radars. Burned once, these
investors are in no mood for further pain. Yet asWarren Buffett
has said on many occasions, the greatestinvestment gains come
from unloved stocks.
But I've taken a closer look at this group, and I've found a
few potentially impressive rebound candidates worth adding to
1. Cirrus Logic (Nasdaq: CRUS)
As the primary provider of audio chips to Apple, it's easy to
understand why thisstock soared in the summer of 2012. Explosive
demand for Apple's iPhones and iPads led to a string of
estimate-topping quarterly results, which eventually pushed
Cirrus' stock to $45. But the eventual slowdown behind Apple's
31% drop has pushedshares of Cirrus down an even sharper 43%
during the past six months.
Cirrus' management realized that an increasingly tight
relationship with Apple would eventually lead to such headaches.
Apple has represented more than two-thirds of Cirrus'sales in
recent years, which led Cirrus to start spending heavily to
branch out into new niches and customerbases . Thanks to
robustcash flow and a cash-richbalance sheet , Cirrus' spending
went right into research and development (R&D).
The key to reversing the stock's downward move is for
management to quantify more precisely how increased R&D and
customerdiversification efforts are paying off.
During Cirrus' quarterly conferencecall in January, President
andCEO Jason Rhode's comments apparently came off as vague to
investors, as the stock kept sliding. That's what makes the
upcoming quarterly conference call, slated for April 23, an
important one. Rhode has an opportunity to articulate more
clearly how the company's current $100 million in R&D
spending is paying off with new customers and new industry
At the moment, expectations remain quite low.Analysts
currently expect Cirrus'earnings per share to be stuck in the
$3.50 to $3.75 range for fiscal 2013 and 2014, yielding a
price-to-earningsmultiple of about 6.
2. AK Steel Holding (
Are analysts being too myopic in their outlook for this steel
Most analysts rate shares as "neutral" with price targets in
the $3.50 to $4 range, just above where this stock now resides
after falling from $7.50 ayear ago and $15 two years
To be sure, AK Steel has lostmoney for two straightquarters ,
thanks to depressed demand and pricing for steel. The companywill
likely lose money in the first half of 2013 before rising to into
profitability later this year. To paraphrase what analysts are
saying, its shares simply aren't timely.
Yet it's also the case that looking beyondWall Street 's
quarter-to-quarter myopia to a longer-term horizon can make
investors big profits, even if patience is required.
Let's look at the outlook for AK Steel as seen by UBS'
analysts. Although they rate shares as "neutral," they see a
steady rebound in pricing and demand for steel in 2014 and 2015,
which should have an outsized effect on AK Steel'sincome
For example,revenue is expected to rise 4% in 2014 to $6.03
billion, yet a solidmargin expansion should help operating
profits to grow more than 50% to $370 million. By 2015, sales
should rise again at a mid-single-digit pace, which would
pushoperating income past $500 million, according to UBS. By
then, AK Steel would be generating about $1.80 a share in
Still, although shares trade for just $3, or less than double
2015's forecast, few are paying any attention. There's no need to
rush out and buy this stock ahead of the company's upcoming
quarterly conference call, as the results and near-termguidance
will likely be lackluster. In addition, investors will need to
gauge the latest trends on the company's debt-laden balance sheet
to assess whether AK Steel's cash flow will be sufficient to meet
But if the balance sheet holds no surprises when its
first-quarter results are discussed, then you might want to take
action before this stock comes back into vogue. By the time
industry conditions improve and analysts become morebullish with
theirratings and price targets, shares won't still be stuck at
$3. Even if this stock deserved to trade at just six times
projected 2015 profits, then shares would rise to nearly $11, or
more than triple the current share price. And that's still a far
cry from the $65 these shares fetched back into 2008, when the
steel industry's dynamics were truly healthy.
Risks to Consider:
These stocks have badly burned investors, so any rebound may
take some time as investors may be slow to return to the
Action to Take -->
If you are looking for new investment ideas with potentially
robustupside , you need to move away from the crowd and focus on
stocks that most are shunning. As these companies eventually
rotate back into favor, analysts -- and investors -- will be
talking up their newly lowered valuations and opportunities to
regain lost luster.
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