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TheStreet Open House

3 Stocks That Should Rally Nicely in 2011

Stocks in this article: NUVACBKENOC

By David Sterman

The S&P 500 is back near where it was a month ago. A surge into November was met by recent profit-taking as markets headed into the Thanksgiving holiday. In pullbacks like these, I like to scan the lists of losing stocks to see if any bargains get uncovered. I found three, all of which hit 52-week lows this week, and all of which are still solid long-term plays. The pullback in these names should set the stage for a much better 2011.

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I recommended NuVasive (NUVA) two weeks ago as part of a paired trade play against Intuitive Surgical (ISRG). (Read A Unique Strategy to Play Offense and Defense in This Market).

Since then, Intuitive Surgical has fallen roughly 10% while NuVasive has barely moved. That's logical: In a tough trading environment, the short end of paired trade is likely to play out better than the long end. Even as Intuitive Surgical comes back down to Earth, the real story here is NuVasive's eventual upward move. It won't come quickly -- few near-term positive catalysts exist --- but as 2011 unfolds investors are likely to see that NuVasive's recent quarterly missteps are more of a function of an unsettled health care environment than any company-specific troubles.

As the dust settles, the fact that NuVasive's technology leads to improved patient outcomes and lower total health care costs is likely to again be the focus of health care insurers, and investors. Shares trade for less than 20 times next year's earnings for the first time in the company's history going back to 2004. A forward multiple closer to 30 still seems justified in the context of long-term growth, and that means 50% upside in 2011.

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