Rational Investing

10/22/2004 12:00 am EST

Focus:

Jamie Dlugosch

Editor, The Rational Investor

Congratulations to Jamie Dlugosch. His excellent newsletter, The Rational Investor, has just become part of the Phillips Publishing family. We wish Jamie and Phillips the best of success in their new partnership. Meanwhile, here’s a sample of his latest advice.

"My research has unearthed some great buy candidates for us. Here are some of the stocks currently on my radar screen:

"Archer Daniels Midland Company (ADM NYSE) is one of the world’s largest vertically-integrated food companies. Over the last six months, sales exceeded $36 billion and explosive growth in India and China provided ample opportunity to significantly grow sales in the coming years. ADM is considered a defensive stock; it is a longtime favorite of professional value managers. Analysts expect ADM to earn $1.19 in the current fiscal year ending June 2005 and $1.31 for the following year. The company trades for approximately 13 times forward earnings. Over the last four quarters, ADM has surprised Wall Street by delivering double-digit earnings growth. With its strong financial balance sheet and moderate growth prospects, I think ADM is a great candidate for most portfolios. I would be a buyer of ADM up to $18 per share and my target is $36.

"aaiPharma (AAII NASDAQ) has truly fallen on hard times, having lost 95% of its value from its heady days of trading for over $30 per share. The disaster started with an earnings restatement, SEC filing delays and investigations, and a complete restructuring of management. In the aftermath, the company faces a growing mountain of litigation, and it remains to be seen if the business can survive. The company recently announced that it was in default with respect to a $10 million interest payment and has been given a grace period of 30 days to find a solution. Bankruptcy is quite likely unless management can negotiate with current lenders. If not, bondholders may end up owning the company in its new form, with existing shareholders completely wiped out. From an investing standpoint, there’s not much to be excited about except for the potential gains if management is successful in navigating these shark-infested waters. This stock is not for the faint of heart.

"I’m a big fan of the advertising industry as the sector recovers from a several-year recession in business. I am also a big fan of technology and the Internet from a growth perspective. Advertising on the Internet is one of the fastest-growing segments of the new technology. ValueClick (VCLK NASDAQ) offers a suite of products that enable marketers to advertise and sell their products through multiple online channels. The company is profitable as analysts expect VCLK to generate $0.28 in earnings during the current fiscal year. That number is expected to grow to $0.37 in 2005. The stock trades for a rather modest 35 times 2004 estimates and only 27 times 2005 estimates. With profit growth expected at 35% and real profits coming in the door, the market is underestimating the potential at VCLK. The online market offers explosive growth opportunity, and the advertising industry is rebounding. I would be a buyer up to $15 per share. My target for the stock is $30."

"Digital Generation Systems (DGIT NASDAQ) operates a digital network for broadcast advertising, and services over 10,000 radio stations and 2,200 TV stations in North America. DGIT is in decent shape financially, with little debt, and a small war chest of cash on its balance sheet. At the same time, the company is profitable. And yet shareholders have treated the stock as if it is going under, trimming nearly 50% off the value of DGIT shares in 2004. To us, this scenario does not compute. Analysts expect the company to make $0.10 in 2004 and $0.13 in 2005. If DGIT meets those expectations, earnings growth would be an impressive 30%. The company trades for a multiple of 12.6 times 2004 earnings and only 9.7 times 2005. Management’s strategy is sound, and the company has demonstrated an ability to survive during very challenging conditions. Eventually, investors will discover this gem of a business. I would be a buyer up to $2 per share. My target price is $4."

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