Should You Snag These Stocks? - finance

Kiplinger's Personal Finance Magazine, August, 2001 by Jeffrey R. Kosnett

STOCKS | We rate the prospects for a dozen that have dismayed shareholders.

THINK FILM for your camera and what comes to mind but those yellow Kodak boxes? Mention Campbell Soup and you may start humming "M'm, m'm good." Most people say they "xerox" a document rather than duplicate it. Kodak, Campbell and Xerox own some of the most famous brands in the world. But as investments, they've all been miserable failures in recent years.

The question now: Can these battered blue chips pull out of their dives anytime soon--or should they be labeled lost causes?

This is the right time to address prospects for fallen icons because investors have rediscovered the allure of cheap merchandise. The market's tilt toward value improves your odds of making money in such stocks. You might be able to make a killing. For example, shares of Bethlehem Steel and Xerox recently posted one-day gains of 25% and 39%, respectively, after the companies reported that losses weren't as large as expected.

Sustained turnarounds do happen. Loading up on IBM in 1993--when it seemed as if the technology revolution had passed by the lumbering computer giant--would have made you rich. The stock has since appreciated 12-fold. Or consider General Electric, a collection of poorly performing businesses in the 1970s: Its stock price has multiplied 50 times since.

So here's our call on the prospects for 12 widely held dogs. We've grouped them into three categories. Signs of life means we think the stock can regain at least some of its lost glory and deliver above-average results over the next year or two. On the fence means a company could go either way; consider these stocks keepers. Sayonara means sell the dodos now. (We've excluded high-tech and phone companies because most of their problems stem from short-term, industry-related issues.)

Signs of life

A HALF-CENTURY ago, Bethlehem Steel stood tall, the second-largest player in a group that collectively went by the name Big Steel. Today, Bessie is a relic. To survive steel's decline, it has shuttered mills, fired thousands and demanded union concessions. Even so, the company continues to spill red ink, and its shares flirt with penny-stock status. In the 1950s, those shares fetched nearly $200 apiece (before adjusting for splits). The company is expected to lose money for the third straight year in 2001.

BUY | Bethlehem Steel

Symbol: BS
Recent price: $4(*)
Earnings per share 2001: -$2.36(e)
P/E ratio: Not meaningful

[GRAPH OMITTED]

But Bethlehem isn't going down without a fight. It's making substantial capital investments in its Sparrows Point, Md., and Burns Harbor, Ind., plants, and CEO Duane Dunham insists that Bethlehem will avoid the fate of the 17 other domestic steel-makers that entered bankruptcy reorganization. Another positive sign: The steel industry may be scoring political points in Washington in its perennial fight against cheap steel imports. Just a hint of that sent Bethlehem stock up strongly in early June.

Analysts see Bethlehem turning a modest profit next year of 34 cents per share, according to First Call/Thomson Financial. Profitability is contingent, says analyst Michael Gambardella of J.P. Morgan, on an improving economy and on weaker steel producers continuing to close. Given those conditions, he sees the stock hitting $5.30 within a year--a nice bump up from less than $4 recently.

IT'S TOUGH making money in tires. There are a lot of players, pricing is brutal, and raw-material costs have soared. If not for an accounting change, Goodyear Tire would have lost money in 2000. Moreover, Goodyear hasn't benefited from the woes of Bridgestone/Firestone.

BUY | Goodyear Tire

Symbol: GT
Recent price: $29(*)
Earnings per share 2001: $0.73(e)
P/E ratio: 40

(*) to June 1

(e) estimate

[GRAPH OMITTED]

But Goodyear, the world's largest rubber maker, performed admirably for much of the 1990s. Profits rose steadily from the 1990-91 recession until 1997, and the stock soared by 1,100%. But earnings began to sink in 1998, and the company has reported losses for several quarters in recent years. The stock hit an all-time high of $77 in 1998, then plunged to $16 before rebounding to $29 recently.

Through it all, Goodyear's good name and size kept it in a position to rebound. It's moving into Asia. It bought the Dunlop brand, which is big in Europe. Goodyear and Michelin could end up the two most powerful survivors if the industry consolidates, as some expect. Goodyear's decision "to broaden its global footprint" and savings from dismissals and plant closings (which the company puts at $250 million annually) should improve profitability, says McDonald & Co. analyst Saul Ludwig. "I can see the stock going back to $50 in two years," he says.

IN THE MIDST of the nation's long housing boom, shares of Whirlpool remain below 1994 levels--this despite a big runup since last October. Throughout the 1990s, Whirlpool struggled to achieve even a thin profit margin. But now the maker of refrigerators, washing machines and other devices is pushing the right buttons. Manufacturing efficiency has blossomed, and a new line of high-end appliances shows promise. Moreover, Maytag, Whirlpool's biggest rival, has financial and management problems.