The Shoes of the Bottom-Fisherman

It's a risky game, but the rewards of bottom-fishing can be stunning. Tenfold payoffs over a few months are not unheard of, though I'm happy with much smaller but still substantial gains.

Before I launch into some stocks I find interesting as bottom plays, let me first deal with definitions, because I use the term "bottom-fishing" differently than some others do. And I'm willing to hold longer than many today.

I don't think only dollar stocks qualify as bottom-fishing targets. Sure, it's great to find a stock selling for $1.25 that triples or quadruples while you hold it. You can buy a lot of shares at that price, and a stock you buy for a buck and a half doesn't have to move far to deliver a 100% or 200% return, or more, on your money.

But I'm at least as much interested in stocks selling for more "normal" prices -- say, $20, $30, $40 -- as long as they meet my fundamental test for a bottom-fisher: a stock selling waaaaay below where it should be ... and will be, fairly soon again, in my view.

Timing is also an issue. Some look for bottomed-out stocks they can flip quickly -- the trader's approach. I'm always sensitive to opportunities to flip stocks I've recently bought, if the price has moved up enough and I sense a stall-out ... and I try to remember not to be a pig, to harvest those quick triples before they become losers. (Indeed, in my experience plumbing the bottom of the market, I've found that the cheap stocks that suddenly take off quickly are much more likely to sag sharply again, wiping out my paper gains, than those that build more slowly. I usually sell the fast-moving ones quickly, and move on.)

But that isn't my target, nor my plan.

My baseline rule for bottom-fishing stocks: issues I feel sure will double, and have a good chance to triple, within two years. That's right: two years. That's an eternity to many of today's traders, I know, who can't imagine having their cash tied up in one stock so long.

But then, I'm an investor, not a trader. Different game.

And "only" doubling or tripling? Excuuuse me, but despite the go-go mania of the Net Stock Era over the past couple of years -- when we saw stocks run up to 10 times their IPO price in just months -- I'm still such a fuddy-duddy that I consider doubling a pretty good return. After all, that's 50% a year on your money ... and remember, I'm hoping for a triple or better.

Smaller returns? Well sure, sometimes I don't get the doubles and triples, let alone better, but I figure the risk involved in these stocks demands at least the potential to double to make it worth the play.

All that said -- and please remember my warnings from Thursday about the risks of losing everything when you play the bottom-fishing game -- here are some beaten-down stocks I think meet my test, or better.

RealNetworks (RNWK:Nasdaq - news - boards) selling under $25 Friday makes no sense at all. You don't have to look back to its (split-adjusted) 52-week high, $96, to see that there's more value here. Yes, like many of these stocks, RealNetworks was an even better buy a couple of days ago, when it (briefly) cratered at $15, but I think it has a long way to go up from $26.

RealNetworks has a strong and growing business, both selling and giving away streaming-media tools. Most of its client-side products are given away ... but that builds the market for its expensive, high-margin producer-side products. Because it pockets ad income from visitors to its site, the market saw ad revenue falling, industrywide, and clobbered RealNetworks.

Dumb move. Real is a perfect fit with my bottom-fishing criteria.

So's Covad (COVD:Nasdaq - news - boards), which I mentioned the other day . Now under $6, Covad spent a long time this year in a trading range of $20-$30, and I think it's headed back there ... and eventually, higher.

Covad sells DSL service, through local phone companies' switching centers. It failed to meet some targets, had an awful earnings report, and got the usual treatment we've seen this summer and fall: Bombs away, down from $10 to $3.62 in five trading days. I think Covad's headed back up into the low $20s, at least, and ultimately probably a lot higher -- though I'll probably bail in the high teens, somewhere around a triple.

Covad signed a landmark distribution deal with SBC Communications (SBC:NYSE - news - boards) -- the only regional bell operating company that seems to "get" the future of the DSL market -- in mid-September. Under it, SBC will resell Covad DSL connections all over the country (not just in its own service areas); guarantees Covad $600 million in revenue from those sales over the next six years; and will invest $150 million in Covad in return for a 6% stake.

Downright cheap at under $6.

It's already up about 30% after bottoming out the other day around $12, but I think E*Trade (EGRP:Nasdaq - news - boards) has a bright future. Unlike other online brokers, it has its own bank and chain of ATMs, which makes it easy to get money out of the system, as well as into it.

In my personal experience, only Schwab (SCH:NYSE - news - boards) and Fidelity match E*Trade's quality of service and fast trade execution. I was also encouraged by Chairman Chris Cotsakos' comments on E-*Trade's earnings call about the company's joint banking and brokerage wireless initiative. The company was expected to break even in the fourth quarter, but delivered a nice upside surprise, earning 2 cents in a notoriously difficult quarter for online brokerage firms.

I think buying E*Trade at $15 is going to look very smart a year or two out. Brokerages will obviously benefit from the rally now beginning, and while I expect many of them to do well over the next year, Cotsakos' broader vision will, I think, propel E*Trade into the front of the pack.

Portal Software (PRSF:Nasdaq - news - boards), which despite the unfortunate name doesn't have anything to do with building Web portals, is another beaten-down stock I like. Portal is the leading provider of billing software for Internet Protocol-based communications systems. With name-brand customers around the world locked into its software -- no one wants to change billing software without a very good reason -- Portal is in a sweet spot as wireless explodes and landline communications migrate to IP traffic.

I think Portal, now down around $30 from three times that price in March, is another good fit with my bottom-fishing criteria.

Yes, yes, you say -- well and good. But despite what I've said above, you want some cheap stocks. Ones with an obvious potential to move up a nice multiple. OK, for the fearless, some real el cheapos next time.

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Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour was long E*Trade and Portal Software, although positions can change at any time. Seymour does not write about companies that are, or have been recently, consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites you to send your feedback to Jim Seymour.