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Rebound Stock-Picking With Book Value

Stocks in this article: FL ESV IACI

Yet, it's hard to be equally sanguine on the prospects of the retailer Abercrombie & Fitch (ANF), which is much more beholden to the fickle tastes of teens. The retailer has held up fairly well in this downturn, and analysts believe EPS could still approach $2 this year, but the stock shouldn't be viewed as purely cyclical.

Other stocks on this list can't be viewed through the context of cyclical earnings and instead are pure "balance sheet plays." IAC/InterActiveCorp (IACI) trades pretty much for its cash holdings and is not given much credit for the value of its holdings, such as Ask.com, Citysearch.com, Match.com, CollegeHumor.com and the Daily Beast (which is quickly gaining traction as a rival to the Huffington Post).

Ideally, you can find a stock with a defensive valuation (at or near book value) that is cash-rich and poised for significant upside when the market improves. That would appear to be the case for Ensco International (ESV), an oil driller that will likely have little good news to report when earnings hit the wire this Thursday, Feb. 26.

This is a lousy time for the energy sector, with prices low and drilling activity falling fast. But Ensco is still expected to stay nicely profitable through this downturn. Analysts say the company can earn more than $7 a share this year, but you should assume that the forecast may be too aggressive. Management may well dampen the profit outlook later this week, and that could push shares below the 52-week low. But even if per-share profits only end up at around $3 to $4, then shares sport a reasonable 6 to 8 times earnings multiple on that lowered forecast.

Energy watchers say that later this year, the sharp production cuts will set the stage for rising energy prices. And that should set the stage for the next cycle of rising drilling activity. And in that phase, Ensco looks positioned to again generate $6 to $8 a share in profits, which looks pretty good for a stock trading in the mid-$20s. And for a stock already trading below tangible book value, it seems unlikely that any near-term pressure on the stock due to the imminent earnings release will be short-lived, because of that balance sheet strength.

This was originally published on RealMoney on Feb. 24, 2009. For more information about subscribing to RealMoney, please click here.

David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.
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