Two Buys for Bottom Fishers

01/29/2008 12:00 am EST

Focus: STOCKS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Jack Adamo’s Insiders Plus, says recent stock market declines have created some big bargains, and he names two.

Aside from a few black holes in the finance sector, stocks are not particularly expensive based on historical P/Es, even allowing for weaker-than-expected earnings. Moreover, the drops in some industries have left bargains that should almost inevitably lead to outsized returns for recent buyers.

American Eagle Outfitters (NYSE: AEO) rallied [recently] on news of a rollout of a new line of children’s clothes. I’m not sure that’s the real reason. If the market remained negative on the shares, it would have brushed off this news. More likely, investors are recognizing that the fear is way overdone in American Eagle. Lone Pine Capital, one of the better-performing hedge funds, has taken a 5.4% stake in the company. That may have influenced the market.

More smart money is getting in on the act, too. Meryl Witmer, consistently one of the top performers in Barron’s Roundtable, recommended the stock.

[The stock had a] nice rise on Monday, as is often the case following positive write-ups in that publication. (It stayed up during the week and closed Monday above $23—Editor.) Whether the increase will stick is less certain. Nonetheless, the endorsement of Witmer and Lone Pine might provide some comfort to those who were wondering if I’ve lost my mind. If I have, at least I’m in good company. Buy American Eagle Outfitters up to $28.

Newspaper publisher McClatchy (NYSE: MNI) [has sunk badly]. However, good news came out of the company. It sold its jointly-held SP Newsprint Company, from which it will clear about $40 million after taxes. The money will be used to reduce debt. In addition, the company announced that CareerBuilder—an online jobs site also jointly held with other media companies, as well as Microsoft—is branching out into human resources consulting with a new, independent firm called Personified. The company will market CareerBuilder's data on job seekers to companies looking for "talent management solutions."

What we are seeing unfold here is a classic lesson in capitalism. An industry that has problems is experiencing a massive flight of capital to perceived greener pastures. The assets are left for dead and sell for the price of a bucket of dirt. Meanwhile, the stakeholders work their brains to the bone finding ways to increase return on investment. Those who get in near the bottom will be rewarded with high returns, as the problems are solved in an environment of lessened competition brought about by the flight of capital. Stick around and watch how it works.

This may not be the fastest turnaround in the portfolio, but it might very well be one of the most lucrative. I expect this stock to double within four years. You have a 7% yield while you wait. McClatchy Company is a Buy up to $13.75. (It closed below $11 Monday—Editor.)

Subscribe to Jack Adamo’s Insiders Plus here…

Related Articles on STOCKS