Turkeys That Could Fly in '05

All of these are down at least 10% for the year, or a minimum of 15 percentage points worse than the S&P 500 itself. Yet all are rated 8, 9 or 10 by StockScouter, which means the stock-rating system considers them good bets to outperform the market over the next six months. Most are up substantially in the past month after the election relief rally.

The whole list will probably outduel the broad market over the next six months, but the real sport is in picking a couple that will lead the pack. The first three look terrific from a technical perspective.

KLA-Tencor (KLAC) has just crossed up over long-term resistance to make a new recovery high on the strength of a very strong first-quarter earnings report. Siebel Systems (SEBL) is also muscling up above resistance, as is QLogic (QLGC). The next nine names on the list are struggling, so while they might work out over the next six months, their near-term prospects are limited.

Pick an M

Perhaps the most interesting stock on the list, however, is Maxim Integrated (MXIM). The price is currently the same as it was in late 2002 during the middle of the second down wave in chip sales.

Maxim, one of the blue-chip semiconductor makers, appears to be under accumulation as investors are biding their time while inventory is worked down at customer warehouses across the world. In the next up cycle, which could start as soon as the second quarter of next year, analog chip makers should do very well. And I think Maxim, whose products are used in everything from wireless handsets to automotive and medical devices, will be a leader again.

Cash flow, revenue and earnings growth are all outstanding, and the valuation is not outrageous. Furthermore, Maxim is one of the few technology stocks that have advanced in all but one of the past 10 calendar years. (It sank 37% in 2002.) It is on track to lose 10% this year, but if my fundamental and technical models are correct, Maxim has the potential to find its wings in 2005 and get to $60 by December of next year. That would be a 40% gain.

So here we have an interesting value-investing dilemma. Which of the following three Ms in health care, financial services or tech do you think will do best over the next 12 months: Merck, Marsh & McLennan or Maxim? Email me your response along with your reasoning, and I'll publish the best answers in a future column. Put MMM in the subject field.

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