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12 Buys of Christmas, Part II

This commentary originally appeared Dec. 21 on RealMoney -- the popular investors' source for comprehensive financial coverage and insightful analysis. Click here to learn more.

NEW YORK (RealMoney) -- On Monday, I ran the screen above to see what were the freshest, most-interesting long names that were percolating to the top of my Christmas shopping list.

I find that one of the secrets to investing success is to fish where they are biting. On the long side, we are looking for names where the company will outperform the market's expectations. The screen identifies these low-expectation names by combining the best earnings-per-share estimate revision trends with low valuation. The top 12 are listed in the table above.

>>12 Buys of Christmas, Part I

>>12 Buys of Christmas, Part III

We looked at the top four in Monday's post, so today we will move on to the next four. Relative to the universe of stocks, these four also have the strongest upward-pressure on earnings, but are a bit more highly valued. Of course, I would hardly consider a stock trading at 6x as expensive.

PennyMac (PMT) is the controversial start-up formed by ex-Country Wide executives to buy back the lousy mortgages they originated in the first place. Leaving aside the moral question of whether they should profit from the destruction they caused in our economy, the fact is that the company's earnings are working, and can be bought cheaply. PMT targets distressed mortgages, with 54% of the portfolio being in foreclosures. Even without capital gains, the 12% yield will supply an attractive return. The stock trades below book, even more so than the rest of the mortgage REIT sector, so there is the potential for an upward re-rating.

Synutra International (SYUT) has been a disaster this year, declining from $14 to $4, but the turn may be here. The company sells powdered milk and infant formula in China. That geography alone explains half of the decline, as no group has been more out of favor than the China names. Synutra last week pre-announced a return to profitability after recovering from the melanine scare last year. Product promotion and the outlook for a solid 2012 Spring Festival should drive the stock higher.

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Goodyear Tire and Rubber (GT) is not a hard one to figure out, as it is tied to the recovery in auto sales. Volume has not been great, but pricing is firm and the mix is improving to higher-margin tires such as winter treads. There are definitely macro fears, especially if Europe suffers a slowdown. But for now, raw material inflation is receding, which can drive further margin expansion.

Similar to CAI (CAP) from Monday, Textainer (TGH) leases marine cargo containers. Although classified as a financial, the company will benefit from steady improvement in cargo transport worldwide as the global economy slowly recovers. The valuation is probably inordinately low due to the precarious financial state of a few of the shipping lines that lease from TGH. The coming year should be robust if the liners hang in there and stay current as shipping volumes recover.

At the time of publication, the author had no positions in any of the securities mentioned.

Stock quotes in this article: PMT, SYUT, GMT, THG 

Gary Dvorchak is a managing member of Channel Island Partners LLC, a Los Angeles-based hedge fund that manages large cap growth and growth-and-income funds. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.

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