Rational Doublers

04/21/2006 12:00 am EST

Focus:

Jamie Dlugosch

Editor, The Rational Investor

In his exceptional newsletter  The Rational Investor, Jamie Dlugosch looks for long-term growth and value ideas. However, for those seeking high risk gains, he offers a look at a variety of battered, low priced stocks with the potential to double. Here's a sample.

"What does it take to make it onto this list? Often, these stocks will have had some sort of problem with its business that resulted in a decrease in value. Many of these problems, like accounting troubles, lead to earnings restatements and are only temporary in nature. I look for companies with future prospects that can outlive their momentary shortcomings. Strong brand equity is a plus-it helps propel a company to future earnings growth.

"Sound companies with low valuations tend to signal the bottom of a cycle. That's precisely the time when investors should jump on board. From a valuation standpoint, I like to see a stock trading for low multiples to sales and earnings. Future expected earnings growth from the analyst community is a strong point. So is a solid balance sheet. Please keep in mind that all of these stocks can be very volatile and should be used for risk capital purposes only.

"Ditech Communications (DITC NASDAQ) is a global telecom equipment supplier for voice networks. Recently the company entered the voice over internet market. DITC dropped precipitously in late 2004 from a high of $24 per share to a recent low of $6. The telecom sector is awakening from a long slumber. I want to own DITC at the bottom of the cycle. Buy DITC up to $11. My target is $22.

"Input/Output Inc. (IO NYSE) provides seismic imagery technology used by the oil and gas companies. At current prices, shares of IO trade well below its earnings growth rate. That spells opportunity in my book. Even if oil prices stabilize or drop slightly, exploration should be a huge part of capital expenditures for the entire oil complex. IO can be expected to benefit for years to come. Buy IO up to $10. My target for the company is $20.

"Sanmina-SCI Corp. (SANM NASDAQ), a circuit-board contract manufacturer, has dropped from $15 to $4 over the past three years. As the technology sector suffered, so did margins and profits. SANM has fallen on hard times, but I believe the cycle will end soon. Analysts expect SANM to generate a profit for the September 2006 year of $0.29. Patient investors can buy up to $5. My target is $10.

"Sun Microsystems (SUNW NASDAQ), the large-cap networking behemoth, was once left for dead, but has been showing signs of life recently. Could it return to the earnings growth glory of the 1990s? Probably not, but buyers here at $4.75 needn't worry. The company is near breakeven and a modest 15% earnings growth offer investors at current levels doubler potential. Buy SUNW up to $5 per share. My target is $10.

"Any list of doubler stocks wouldn't be complete without a semiconductor stock. Integrated Silicon Solution (ISSI NASDASQ) makes random access memory chips used in a variety of digital electronic devices and mobile phones. Shares have been distressed as the company struggles to return to positive earnings. The $6.29 current price is a good value, in my opinion, and ISSI could be our next tech doubler. Buy up to $7. My target ISSI is $14."

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