Twelve ‘Rocky’ Stocks To Watch

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It happens time and again in the boxing ring: One of the fighters gets beaten up pretty badly, is knocked to the canvas several times, and looks to be just about ready for the count. Suddenly, almost miraculously, he gets a second wind, stages a remarkable comeback, and knocks out his opponent, something out of one of the “Rocky” films.

One veteran investment adviser, Richard Moroney, sees a similar occurrence on Wall Street. Taking a leaf from a wealth-building strategy that works — namely, buy low and sell high — the editor of the well-regarded newsletter Dow Theory Forecasts of Hammond, Ind., has compiled a list of a dozen outof-favor, beaten-up companies that the 60-year-old monthly newsletter vigorously recommends. Like the battered fighter, these stocks — which appear down, but are not out — are viewed as solid comeback candidates.

What makes them especially tempting, Mr. Moroney points out, are the following favorable characteristics:

• Good growth prospects, with current year earnings per share gains pegged between 13% and 70% versus a year ago.

• Reasonable valuations, with priceearnings multiples ranging bewtween 10 and 19 based on trailing 12-month earnings.

• Share prices that are down between 13% and 28% from their 52-week highs.

From a market standpoint, prospective rebounds of 15% to 20% are seen over the next 12 months.

Of the dozen stocks, here’s a brief look at the newsletter’s three top picks:

Affiliated Managers Group, an asset manager that has seen significant investment inflows in recent quarters and expects the trend to continue for the rest of the year. In June, the company said business was “terrific,” with strong returns from its eight largest affiliates, which combine to generate 80% of profits. Through a mix of acquisitions and internal growth, Mr. Moroney figures the company should be able to meet or exceed consensus estimates that call for per-share profit growth of at least 13% in each of the next two quarters. The stock is down 22% from its March high.

Harris Corp., a manufacturer of communications products for the government and commercial users worldwide. The company has topped consensus profit estimates in each of the last eight quarters and averaged growth of 58% over the past four quarters. Between June and mid-July, Harris won at least $219 million in Army contracts and signed supply deals with major broadcasters in four countries. In July, Harris also agreed to provide the Army with a new line of Falcon 3 radios, a key step in the pursuit of a share of a $1.7 billion radio upgrade contract.

The military business remains strong and the broadcast business is picking up, as the company predicted. The military is also increasingly dependent on sophisticated electronics and communications equipment, two areas in which Harris excels. Consensus estimates project 19% per-share profit growth in fiscal 2007, ending June 30. At 15 times projected year-ahead earnings of $2.46 a share, Harris’s stock, down 23% from its February high, appears cheap, Mr. Moroney says.

Ingersoll-Rand, a maker of industrial machinery, is down about 25% from its May high, reflecting fears of a downturn in the housing market and expectations of slowing global growth. However, there is no specific news from the company, which is expected to benefit from strong nonresidential construction spending. Meanwhile, earnings estimates have remained steady and consensus estimates project per-share profit growth of at least 13% for the June quarter and the full year. Another plus, according to Mr. Moroney: The stock trades at less than 11 times expected 2006 earnings of $3.52 a share.

Rounding out the newsletter’s list of 12 down but not out stocks are Energen, Freeport-McMoRan, Home Depot, L-3 Communications, Nabors Industries, Nordstrom, Norfolk Southern, Parker Hannifan, and UnitedHealth Group.

This year’s biggest projected earnings gainer among the 12 companies, with estimated growth of 70%, is Nabors. The biggest decliner from its 52-week high, 28%, is Freeport-McMoRan.


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