Back From the Dead

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.

But, again, courtesy of low interest rates, Conexant bought back debt, spun off Mindspeed, and has now become the single best way to play the broadband revolution that I know. It’s up from 53 cents, but it also is about to start making money, something that wasn’t clear when it was a penny stock. I own a boatload; I wish I owned more. Like many of its zombie brethren, it was abandoned at the bottom by the research analysts. It has no champions yet. But just wait until it reports that first good quarter.

4. E-Trade
I missed the first four points of this comeback-of-the-year play, perhaps because I was too busy owning Schwab. But I have shifted out of the latter and into E-Trade in a big way because the management of E-Trade has a pretty fantastic balance sheet and growing businesses in both mortgages and stockbroking. In fact, the latter’s on fire—the company just reported a whopping good quarter. There are a lotta ways to win with E-Trade, either on earnings, on which it is worth twice what it is selling for, or perhaps on a takeout, as it is perfectly complementary to what Barry Diller has built at InterActiveCorp. If Barry buys E-Trade, I hope he keeps Mitch Caplan, the man who runs the joint; the guy’s a miracle worker after the havoc that the previous E-Trade management caused.

“While these stocks areno longer playing dead, notone is expensive. I’ve been building a basket of them.”

5. ValueClick
When you read that the online advertising market is booming, you should think of ValueClick, which has consolidated the space and has its fingers in everything from affiliate marketing to direct e-mail (to replace telemarketing). It has a great balance sheet with virtually no debt and oodles of cash, so it could be taken over if it doesn’t keep growing. I didn’t own any of it, hoping for it to come down, but I decided it was a fool’s game to wait, and just bought it.

Look, I don’t know which of these stocks will be the big winners from here and which will languish, regroup, and then take off later. I don’t know which ones could get hammered and go back to penny status—although it would take an awful lot of bad management from here to make that happen.

My suggestion, as I said earlier, is to buy a basket. Own them all. There was a time when Alan Greenspan called stocks like this lottery tickets and laughed at buying them. They were laughable back then, and hideously overvalued.

Now, while these stocks are no longer playing dead, not one is expensive. And it only takes one or two of them to go back to where it was—and that can happen (consider eBay and InterActiveCorp)—to make you more money than you ever thought possible in the new post-Nazz-crash stock market of 2003.

Back From the Dead