The coming months could prove to be an enticing time for
investors. Many stocks are trading well off their highs under the
assumption that the coming streams of economic data will prove to
be disheartening. If we indeed are in for a tough slog in the
months and quarters ahead, then many of these stocks could meander
at their current cheap valuations. But even modestly good news on
the economic front could sharply boost interest in stocks, as we
may be looking at the beginning of a sustained economic upturn.
We can use 2002 as a reference point. Prospects were glum and many
stocks sported low
ratios. That set the stage for a powerful two-year run that pushed
the S&P 500 up +23% in 2003 and +11% in 2004, while a range of
individual stocks doubled off of their lows. With that in mind,
here are some stocks that could sharply benefit from a more
positive economic backdrop or simply better news out of quarterly
In early June, shares of Winnebago soared after the company
announced that sales in the all-important spring season were very
robust. Management noted that demand for recreational vehicles was
quite strong compared to a year ago, though below levels seen just
a few years ago. The euphoria eventually faded, and shares have
lost nearly -40% during the past three months.
Winnebago's rebound may prove to be erratic. After all, the winter
months can be fairly lean. But if investors start to see signs that
the consumer is beginning to spend, then Winnebago will be seen as
a prime beneficiary of an improving economy. It's important to
remember that consumers that were relatively financially healthy
heading into the downturn have also sharply boosted their savings
rate. At some point, those consumers may feel comfortable treating
themselves to high-ticket purchases.
After the recent sell-off, shares now trade for about 20 times
fiscal (August) 2011 forecasts, and more importantly, six times
annual profits in the middle of the last decade when the industry
was at its peak. Demand for RVs should eventually rise back to that
peak, as the amount of baby boomers continues to grow. Assigning a
multiple of 15 off of those peak earnings would push shares up to
$30, nearly +200% above current levels. That price target is
unlikely to be seen for several years, but for patient investors,
Winnebago could be a real home run.
A123 Systems (Nasdaq: AONE)
This maker of advanced battery systems was initially a hot
, but perhaps came out just a bit too early. The company posted
several lackluster quarters after
, sending shares down from $28 to under $8. Shares have started to
rebound in recent sessions back up $10 as investors start to
realize they were judging the company's results while the electric
car market has yet to really take off. But it will. Soon after the
Nissan leaf is released in late 2010, a slew of additional electric
cars will hit the market from companies like Mitsubishi, Smart,
Chrysler/Fiat and perhaps BMW.
As investors start to re-focus on this potentially massive market,
shares are likely to turn over a new leaf, perhaps back up above
the $20 mark. The next few quarters will likely be lackluster for
A123 Systems, so these shares will only benefit in a rallying
market as investors once again focus on high-growth opportunities.
Biodel (Nasdaq: BIOD)
This medical device company holds a great deal of promise -- or at
least it did until investors lost interest, pushing shares down
from nearly $20 in the summer of 2008 to a recent $4. But a rebound
may be in the offing.
Biodel has developed a device that injects insulin into the
bloodstream more rapidly than other approach. The device can
automatically respond to blood glucose levels, regulating the
amount of insulin required. After several years of anticipation,
Biodel is moving closer to the regulatory finish line.
The insulin device has had a very strong safety profile and has
been quite effective in clinical trials. FDA approval could come
late this year, and the company may sign key partnerships before
then. Might shares once again re-visit those lofty levels seen back
in 2008? Time will tell.
Deer Consumer Products (Nasdaq: DEER)
I've written about this company several times before, usually when
management boosts guidance and extends a current share buyback.
That's about all they can do to support the stock, which continues
to find little love in this market, despite stellar growth
Deer makes kitchen appliances for global brands like
Stanley Black & Decker (
, and is now ramping up domestic sales, steadily building its brand
among Chinese consumers.
The Chinese economy will likely cool off from its recent torrid
pace, but the Chinese middle class looks set to keep expanding.
Sales grew +86% in 2009 and look set to grow another +97% this year
and +28% in 2011. Meanwhile, shares trade for little more than half
their 52-week high, as China-based stocks of all stripes get
heavily discounted in this market. Assuming shares trade up to 18
times 2011 profits, investors are looking at a two-bagger.
Denny's (Nasdaq: DENN)
Management at this restaurant chain has tried every trick in the
book to boost sales, from special breakfast deals to two-for-one
specials. But sales are still in a slump, after falling sharply
over the last two years. Management may simply need to wait until
consumers are spending again, at which time sales could rebound at
a decent pace and profits at a more robust pace. This is a very
high fixed-cost business, which historically has been marked by
profits that grow twice as fast as sales.
Investors don't need to see Denny's rebound all the way back to
full health -- they simply need to start seeing more positive
trends and then extrapolate future results from there.
Even with the sales slump, Denny's remains profitable and trades
for about six times next year's projected
of $0.43. Looking out several years, EPS could rebound to the $0.60
or $0.70 level. Slap a multiple of 10 on that and shares could rise
to at least $6 -- double or triple current levels.
Action to Take -->
Winnebago, Denny's and Deer Consumer Products are unlikely to fall
much further, even if the economy remains in a funk, thanks to
supportive fundamentals. They each represent roughly +100% to +150%
upside. Biodel and A123 Systems are more speculative and do have
some downside risk, but also represent even sharper upside
potential. A basket of these stocks stashed away for a while may
prove to be a winning move.
-- David Sterman
David Sterman has worked as an investment analyst for nearly two
decades. He started his career in equity research at Smith Barney,
culminating in a position as Senior Analyst covering European
banks. David has also served as Director of Research at Individual
Investor and has made numerous media appearances over the years,
primarily on CNBC and Bloomberg TV. David has a master's degree in
management from Georgia Tech. Read More...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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