3 Stocks with Comeback Potential

11/07/2011 9:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

When everybody is rushing to the exits and stocks are moving en masse, spending time looking for standout stocks can seem like a fool’s errand. But history suggests periods of market tumult are among the best times to look for bargains, especially when investors are selling indiscriminately, notes Richard Moroney of Upside.

Investors worldwide pulled more than $90 billion out of stock funds in the three months ending in August, more than reversing the total inflows since stocks bottomed in 2009. While holding some extra cash in your portfolio makes sense, this seems an inopportune time to join the crowd and forsake stocks altogether.

Fund investors are notoriously bad at timing the market, and the depressed state of investor sentiment suggests a little good news could go a long way.

As always, we intend to look for buying and selling opportunities one stock at a time. Our approach is unlikely to make money when stocks slump broadly, but our record since 1999 suggests those able to stomach near-term volatility will see long-term gains.

The three stocks listed below passed all of our screens. All three reviewed below trade at a discount to at least seven of the eight implied prices we calculated.

Shares of HealthSpring (HS), one of the largest managed-care providers focused on the Medicare Advantage market, have retreated 23% from the all-time high set in July.

HealthSpring has an implied price of $41 based on its five-year average P/E of ten and the consensus 2011 profit estimate of $4.14 per share. Using the lowest current-year profit estimate, the implied price dips to $40. HealthSpring, with a history of exceeding consensus profit estimates, is a Best Buy.

Iconix Brand (ICON) licenses its portfolio of consumer brands to department stores and discounters. It also operates five joint ventures in China. Per-share profits are expected to increase 14% in 2011 and 11% next year.

If the stock’s P/E ratio returns to its five-year average of 17 and Iconix meets the 2011 consensus profit target of $1.64 per share, the shares would reach $28.

Taking a more conservative approach, if Iconix matches the lowest profit estimate for next year and the P/E moves to 13, the average forward next-year P/E of its industry, the shares would be worth $22. Iconix is a Best Buy.

World Acceptance (WRLD)
This company offers small consumer loans in the US and Mexico. The company has delivered nine straight quarters of double-digit sales growth. Meanwhile, per-share earnings have met or surpassed the consensus in seven of the last eight quarters.

The three-analyst consensus sees earnings per share rising 14% to $6.42 in fiscal 2012 (ending in March), and another 14% in fiscal 2013.

If World Acceptance matches the fiscal 2012 consensus, and its trailing P/E moves to its five-year average of roughly 11, the stock price would approach $71. World Acceptance is a Best Buy.

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