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Growing Concerned About 2005

My favorite name in the group now is Pulte (PHM - Get Report). The company has one of the best organic revenue growth stories in the sector with its demographically driven play in active adult communities. The company has strong growth in new community openings, around 20%, for 2005. At 6.5 times profits, the shares could reacquire a sector-leading P/E like Toll Brothers (TOL) or NVR (NVR) and trade up to multiples of 9 or 10.

Depressed Drug Names

After avoiding the debacle in the drug sector, I've initiated positions in a few beaten-down large-cap names (the big uglies) with very low valuations as well as some small companies.

A favorite here is Impax Labs (IPXL - Get Report), an emerging generic company specializing in difficult-to-formulate products. The company maintains a rich pipeline entering 2005, and I forecast 100% revenue growth and a tripling in profits to $1 per share. At $15, the stock is cheap on my forecast. Just think where this would be if it was a tech stock. Who says value investing needs to be boring?

My tech turnaround theme remains a decent commitment. I've added a couple of new ideas to the portfolio in this sector, including Hewlett-Packard (HPQ - Get Report) and Quantum Corp. (DSS - Get Report).

H-P is simply too cheap not to own, with emerging fundamental improvements. The company also has a few non-operating tailwinds helping per-share profits, including favorable currency and a large share repurchase program.

Quantum Corp. is the potential home-run trade in the sector. The shares trade for an enterprise-to-revenue ratio of only 40%. The company has taken some aggressive steps to reduce operating expenses in order to meet its financial targets of 10% pretax profit margins.

With some exciting new storage-system products and new technology in the digital tape market, the turnaround should happen in 2005. Realizing its profit goals would generate about 40 cents in earnings per share and a stock much higher than $2.50. I've been premature in forecasting a recovery in the past for Quantum. It's time for CEO Rick Belluzzo to deliver the results befitting his resume and compensation package.
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DSS $0.22 2.90%
IPXL $33.60 1.42%
HPQ $11.71 -3.38%
PHM $18.20 -1.30%
WLP $136.01 1.43%


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