10 Dogs Ready to Bark in 2004

Four Trends That Favor the Hounds

Do these numbers guarantee that you'll do better in 2004 with stocks like these than with those that led the market up in 2003? Of course not. There are no guarantees in investing.

But consider the way the cards seem to be falling for 2004.

Money is looking to rotate out of the technology and financial sectors that led the market in 2003. In the technology sector, the move seems to be out of the most overvalued stocks in the group. The prospect of higher interest rates sometime in 2004, the recent earnings warning from mortgage-industry leader Washington Mutual (WM Quote) and the continuing mutual fund investigations have administered a haircut to share prices in the group. Washington Mutual shares, for example, are down 15% in the last month.

The biggest improvements in 2004 may well come from sound but recently troubled companies. That will come as the strong economic recovery, which is what we're looking at in at least the first half of 2004, lifts all corporate boats. Turnaround companies aren't the first to see better sales and earnings, but because recent business has been so weak, the turn from the bottom can be dramatic. Boeing, for example, has been hit with everything from a Defense Department investigation into government contracts to the collapse of both the commercial aircraft and the space sectors in 2003. Earnings per share for the year are projected to drop to $1, from the $2.84 recorded in 2002, a 65% drop. The projected recovery for 2004 will take earnings back to $1.83, an 83% jump, even if it's still well short of the $3.41 per share the company earned in 2001.

Investors are looking for company-specific events that could drive above-average earnings growth in 2004 and 2005. Much of the general economic recovery already is priced into stocks. A reorganization, a change in management, a restructuring of assets all fit that bill -- and my top 10 have exactly those characteristics.

The strong recent economic numbers make investors more willing to take a chance. That is, on companies going through risky reorganizations, management changes and restructurings. Good times give those strategic moves more chance for success and give companies more margin for error.

Not all of the stocks on this list are equal, of course. I'd divide them into three groups.