Update: "Five Flat Stocks Ready to Rebound"
What we said
In "Five Flat Stocks Ready to Rebound" (Oct. 16, 2006) we argued that there was real value, and possibly outsized returns, in seeking stocks that had been shunned by investors, unloved by analysts and beaten down by the market. We dug up five companies that had healthy prospects, strong balance sheets, and low prices for bargain-hunting investors.
All our picks are winners, with five out of five beating the S&P 500, which is up 6 percent since our story ran. Publisher Reader's Digest (Charts) is the champ, gaining 32 percent thanks to a $17-a-share buyout by private-equity power Ripplewood Holdings that closed March 2.
Auto-parts supplier BorgWarner (Charts) comes close with a 31 percent gain so far, earned the old-fashioned way - by sound management of the business. Weakness in the U.S. market resulted in some layoffs and plant closings, but a 20 percent increase in sales overseas in the fourth quarter of 2006 helped raise expectations for 2007. You might want to take some gains on that one.
Sprint Nextel (Charts) has returned an impressive 17 percent, thanks to better-than-expected fourth-quarter earnings and a sunny outlook for 2007. The company is continuing its turnaround and has been the subject of takeover talk.
Del Monte Foods (Charts) has delivered an 8 percent return, driven by growth in the pet food business it acquired in 2005, which offset integration charges and rising raw-product and packaging costs. It remains on track; nothing has happened that would change our recommendation.
The laggard of the group, Home Depot (Charts) was up 7 percent. Shortly after our story ran, private-equity rumors boosted the stock, but no deal materialized. Instead, the board ousted CEO Robert Nardelli after complaints about his high pay during a period when the stock was stagnant - and the market applauded. The housing slump is a concern here, but new CEO Frank Blake has promised to address the company's problems, and the stock is still cheap.
From the April 2, 2007 issue