With each passing year, investors need to change up their playbook. What worked in the prior year may not work this time around [See: "5 Pitfalls for Investors in 2011"]
It's pretty easy to find out what didn't work in the past year. I ran a screen of small-cap stocks that appear unloved by investors, trading for less than 12 times projected profits and less than 1.5 times tangible. These stocks are cheap for a reason: these companies have not been operating in peak form, or have been stuck in an industry that remains out of favor. But in some instances, it looks like these stocks will see better results in 2011.
Before I tell you what the two most appealing names on the table below are, let's take a quick glance at some names that may struggle for a little while longer before becoming clearcandidates later this year.
The shipping industry is still catching up from a building boom that led to too much supply of these specialized ships. As the globalrebounds and demand keeps building, these companies should be able to generate much stronger lease rates as the glut of ships gets absorbed. That may still take a few more quarters, but trading well below tangible , Genco Shipping is a name to watch.
Contract manufacturer Sanmina-SCI (Nasdaq: SANM) has been hit hard by the economic slowdown, which left all companies in this segment with too much capacity. Demand is now rebounding and so are results at these firms. I was a huge fan of Jabil Circuit (NYSE: JBL), which I profiled in December 2010, as it looked set for steady gains. Its have recently surged and aren't the bargain they were a month ago. Sanmina-SCI has missed out on that rally and is now the cheapest name in the group, trading at less than six times this year's profits.
My two favorites
Speaking of trading right at tangible , Nebraska-based ethanol producer Green Plains Renewable Energy (Nasdaq: GPRE) looks quite intriguing at current levels. The company is valued at $400 million, even after it invested in a broad infrastructure project to serve the ethanol industry. Ethanol is a controversial fuel source, as it still uses a lot of carbon in its production (meaning it's not particularly clean), and margins in the business have been scarily weak at times.
But 2011 is shaping up to be a solid year for Green Plains and the whole industry for one simple reason: Gasoline prices. As oil surges toward $100 a barrel, gasoline has moved past the $3 per gallon mark and may move up above $3.50 by this summer. It costs less than $2 to produce a gallon of ethanol, so demand is likely to stay strong and ethanol producers have room to boost prices.
Green Plains' profits already rebounded solidly in 2010 andcould approach $1.50 in 2011, according to consensus forecasts. trade for less than eight times that view. This is never going to be a high multiple business, but I see a move up in the stock to $15 or $16 a share -- from the current $11-- once investors start to understand the pricing dynamics associated with $3 or $3.50 per gallon gasoline.
I'm a big fan of misunderstood businesses, and Earthlink (Nasdaq: ELNK) surely qualifies as one. The provider of dial-up Internet access has seen its languish for a number of years as the cable companies, with their broadband speeds, have taken steady from Earthlink. Yet many investors haven't realized that Earthlink also operates a very healthy enterprise-focused business that has an impressive reach and that has not yet been fully utilized.
In recent months, Earthlink has decided to take action by spending some of if its $600 million in cash to acquire complementary businesses. The key has been to locate rivals that lacked Earthlink's scale and were therefore operating at a loss. That weak position has enabled Earthlink to get these deals at fire-sale prices. In addition, Earthlink has made a case for quickly improving these acquired operations thanks to the synergies derived from absorbing them into the company's national network. In the quarters ahead, Earthlink will be able to prove that it's more than just a dying dial-up provider. Investors, noting that the company is valued at just two times its EBITDA, are likely to warm up to.
Action to Take --> These stocks are cheap for a reason and require further research before you think about adding them to your portfolio. But in an environment where true bargains rarely exist, a few of these names may start to rotate back into favor.