Born Again Blue Chips

04/09/2004 12:00 am EST

Focus:

Gary Alexander

Senior Writer, Navellier & Associates

"Controversy breeds opportunity," says Gary Alexander, editor of SmartMoney Investor Insights. "I am adding four new names to our Core Portfolio. I call them 'born again' blue chips, as they had their glory days, fell on hard times, and are now emerging into a better future."

"These stocks are still cheap, as the market continues to punish them for their past sins. The market is slow to forgive. Many investors are still in a 'lynch the crooks' mindset, which holds these stocks back. That will pass. In fact, companies that get roasted at the stake of public opinion often come back with the cleanest hands of all. What seems riskiest becomes low-risk. New management doesn't want to don a striped suit and dine on prison food. Who will act more responsibly than a new CEO taking the place of a crook? If the business is sound, the stock will come back. I am buying them here and now because their price is right, in a rising market, and a lot more advisors are starting to catch on to their story. Here are four such opportunities:

"Ahold (AHO NYSE) is a Dutch-based grocery chain that fell on hard times last year when a US subsidiary booked sales in a deceptive manner, leading Ahold to overstate profits by over $1 billion. Ahold's former CEO Cees van der Hoeven did the right thing. He fell on his sword and made room for a major housecleaning under new CEO Anders Moberg. Ahold has been selling assets and restructuring its basic finance and governance. The company is on the mend. Shares sold at $41 back in 1999 but fell to $3 a year ago. At barely $8 now, Ahold has a long way to go to regain its 1990s peak. This is not a highflying tech stock, but a grocery retailer, trading at just ten times earnings. I feel Ahold can return to $12 this year and eventually back into the $30s.

"AT&T (T NYSE) is a household name around the world, which has fallen on bad times. But don't count out Grandma Bell. She throws off a generous 5% dividend and trades at just eight times trailing earnings. All the telecom stocks fell on bad times in 2000-02, but AT&T still has a valuable brand name, and is a survivor and a likely leader in the post-consolidation telecom world. The company generated $5 billion in free cash flow in 2003. Measured by cash-to-enterprise value, it trades for half as much as the next closest Bell, Verizon. You can buy AT&T for income alone, even if the stock never increases, but I think it will reach $30 this year.

"Cendant (CD NYSE) doubled last year, but from ridiculous single-digit lows. It was over $40 in early 1998 before its world fell apart. That's after CEO Henry Silverman of HFS teamed with Walter Forbes of CUC to form Cendant. After the wedding, there was accounting fraud (discovered by the HFS team) within CUC units. A messy divorce followed. Cendant provides the unique example of an honest CEO who stayed with a ship under assault and turned it around. Cendant has many businesses under one roof. It is the largest real estate services franchiser, with over 12,000 offices in brands like Century 21 and Coldwell Banker. In lodging, it owns Days Inn, Howard Johnson, Ramada Inn, Super 8, and Travelodge. In the car rental area, Cendant controls Avis and Budget. The stock is still 45% below its 1998 peak. The lawsuits are settled, and the earnings will grow 10% to 15% this year. On top of all that, Cendant declared its first-ever cash dividend in February 2004, equivalent to a 1.2% yield.

"And finally, take a look at a name that hardly anyone likes, Rite Aid (RAD NYSE). I like drugstores in general. Rite Aid's annual sales are more than half those of industry leader Walgreen's, yet Rite Aid trades for just one-twelfth of Walgreen's market valuation. Part of the reason is debt, but Rite Aid's debt is cut in half under new management; and the lawsuit against the past management's actions is settled and paid for. Rite Aid hit $50 in 1998, before accounting fraud by previous management was uncovered. The stock eventually fell under $2 a share, twice, in 2000 and 2002. The stock is still ultra-cheap under $6. It trades at just one-sixth annual sales. New management, under Chairman Bob Miller and CEO Mary Sammons, is among the best in the retail business. I'd buy Rite Aid in a balanced portfolio as long as it trades under $6 a share.

"The prices on these four stocks are so low that I have no hesitation in adding all four to my Core Portfolio. I'd buy AT&T if you need income; Ahold and Rite Aid for capital gains; and Cendant for some of both."

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