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Back From the Dead

Turns out reports of the deaths of certain stocks were greatly exaggerated. Presenting five small caps that are—surprise—roaring back to health.

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We call them the Living Dead. They are the stocks that people gave up on, the ones that weren’t considered worth resuscitating. Some were comatose. Others were booted unceremoniously not only from the S&P 500 but from the ranks of every major mutual fund. Most had, at the bottom, no pulse and no other vital signs.

And now they are roaring, breaking out of the penny-stock and low-single-digit trading ranges that had trapped them for the past three years. They have created scads of wealth for those who believed as they resurrected themselves, Lazarus-like, from the grave.

Is it too late, traders ask now, as the stocks continue their daily levitation?

“Is there anything left?”

To which I say: absolutely, because one of the most amazing things about the stock market is that survivors tend to prosper, and all of these stocks are now prospering beyond anyone’s dreams. In fact, I recommend that if you want in, you build a basket, as I am doing, and pick up a bunch of these still low but no longer absurdly low-priced stocks, banking that they will continue to deliver stellar performance or be taken over, as so many of their ilk have this year.

All of these companies have rapidly improving balance sheets, courtesy of a Federal Reserve that has cut rates more than a dozen times to try to ignite the economy. (These companies have been able to refinance or buy back old debt at much lower prices.) All of these companies have been able to acquire good brands and spin off losing assets in the last year. They are probably only as much as halfway toward where they are ultimately going. I can’t say you ain’t seen nothing yet, because you have. I can say that in most cases I believe the best is yet to come.

So without further teasing, here are the five wonders of modern financial medicine, five companies that have crawled out of the grave:

1. Autobytel
People research cars on the Internet. They love it. They think it helps them get bargains. Autobytel owns this market. It’s where the vast majority of car buyers go, and it gets paid by the bountiful referrals it generates to dealers. It also has targeted advertising, which is booming.

The funniest thing about Autobytel is how unknown it is, even though it makes money and has reams of cash on the balance sheet. I mentioned the stock to a half-dozen managers as an interesting spec and four of them laughed at me, saying that it had gone bankrupt. Two of them, though, owned it and wished they were bigger. I love that.

2. Charter Communications
The rich aren’t like us—sometimes they do really stupid things, like spending a fortune to build a cable network by taking down a huge amount of debt and then watching everyone laugh at them all the way down. But if you happen to be Paul Allen, the Microsoft billionaire, once you hit bottom with your cable venture you get to have the last laugh by injecting $1.7 billion in and refinancing the debt. That’s where Charter is now.

So many hedge funds thought that Allen would let this thing fail that they shorted millions and millions of shares. They are hung now, because Allen’s injection gave Charter time to reconfigure its debt at low prices. Now Charter’s coming back in the same way Nextel came back, refinancing and growing the business again. I just bought Charter at $4 and change. If the Nextel model works, we could have a quadruple on our hands over the next two years. And frankly, the cable business, courtesy of cable modems and higher rates, has never been stronger.

3. Conexant
When this stock traded at 53 cents soon after its deletion from the S&P 500 and its wholesale abandonment by the various big mutual funds, it looked like curtains. This maker of equipment for broadband data and video was saddled with huge debt and a very cumbersome structure that included its Mindspeed division, which was losing money hand over fist.


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