These Dogs Will Have Their Day

01/26/2011 12:12 pm EST

Focus: ETFS

Michael Brush

Columnist, MSN Money

Despite their recent losing streaks, chip maker AMD and American Airlines parent AMR have tremendous upside, argues Michael Brush of MSN Money.

Chip maker Advanced Micro Devices (NYSE: AMD) is a great company. It shows bursts of brilliance now and then that reward shareholders even though it is so outgunned by rival Intel (Nasdaq: INTC).

That will happen again in 2011, believes Patrick Dorsey, the director of stock research at Morningstar. AMD is launching new server chips called Interlagos and Valencia. These chips are based on AMD's Bulldozer technology, the company's first new chip architecture since 2003, when it ambushed Intel with a game-changing line of chips.

Bulldozer allows more processing cores to be packed onto a single chip. This is a big advantage in data centers, and AMD's new chips will help it steal significant market share from Intel in server processors this year and beyond.

The last time AMD outmaneuvered Intel was back in 2003, when it rolled out its Opteron processors. From 2003 to 2006, AMD took a fifth of the market for server chips, and its stock went to $40 from around $5, according to Morningstar. "We think something similar is going to happen this year," says Dorsey. He believes market share gains this time around could double AMD's earnings over the next year or two.

That should double the stock price, too, since most analysts still aren't expecting this coup, says Dorsey. Wall Street analysts have a median price target of $8 on the stock, according to Thomson Reuters. In contrast, Morningstar has a five-star rating on AMD, its highest rating. Five-star stocks tend to outperform over time.

[That $8 price target was more than $1 below AMD’s market price two weeks ago when Brush was writing, but the stock has plunged 19% since as the firing of the CEO sowed doubt about the company’s prospects. But AMD did provide an upbeat sales forecast after its quarterly report—Editor.]

Fly Like a Beagle
Investors obviously don't think American Airlines parent AMR (NYSE: AMR) is a great company right now. Its stock has traded flat over the past 12 months, compared with big gains for most airline stocks. [It’s been all downhill lately, with shares down 16% since Jan. 14 despite earnings that exceeded estimates—Editor.] But it's doing great things in its field that could reward current shareholders with a double or more over the next 12 to 18 months, says one money manager with a good record at making contrarian bets.

American has been held back by higher costs. Unlike competitors, it has declined to use bankruptcy in recent years to reign in labor expenses, and it has an older fleet. The company also has poor customer relations and a small international presence, compared with rivals like Delta Air Lines (NYSE: DAL).

These problems help explain why American Airlines has been the dog of the group, says money manager Don Hodges. But changes in store at American make it a great contrarian play for the year, says Hodges, who is good at contrarian bets. His Hodges Pure Contrarian Fund (HDPCX) beat the S&P 500 by 10.4 percentage points over the past year.

Hodges believes American Airlines' new president, Tom Horton, who joined the company late last year in a management shakeup, will take steps to improve customer relations. American Airlines also has been getting a boost in international traffic by expanding alliances with British Airways and Spain's Iberia Airlines, recently merged into International Airlines Group (London: IAG). American is also upgrading its fleet, which will help reduce costs. And labor contract renegotiations at competitors may soon even out the playing field to some degree, by sending rivals' labor costs considerably higher.

As American works through these changes, it will also benefit from higher ticket prices as the economy improves and airline capacity remains constrained, predicts Hodges. American already turned profitable in the third quarter of 2010 for the first time in years. Hodges expects the profits to continue rolling in throughout 2011.

One big plus for American is that the airline has nearly $7 billion in losses, which it can use to offset profits and reduce taxes for quite awhile. Like those pesky surcharges at the ticket counter, that can make a big difference for investors.

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