Top-10 Turnaround Candidates for 2001, Part 1

Fifty years from now, people will be talking about 2000's Nasdaq bubble blowup. That a market could go from 2300 to 5100 and back in less than two years will be fodder for many pundits, professors and market mavens. Like it or not, the Nasdaq market of 1999-2000 will be forever slapped with labels like foolish, maniacal and greedy.

As turnaround investors, we can't simply select wonderful companies selling at giveaway prices without reference to the market backdrop. It is important to invest within the context of today's market, recognizing that hard lessons have just been learned and that those lessons will affect market psychology.

Much of the 1999-2000 bubble was based on illusion. Companies with little or no revenue, few assets and a lot of naivete were valued in the billions. And scores of investment bankers and brokers willingly promoted those illusions, many of them rushing IPOs to market, well aware that the frenzy was transitory.

So in this jaded context, with a market dazed and reeling, the theme for my Top 10 Turnaround List for 2001 is straightforward: Get real. Listed below are real companies with real assets and real profits. No fantasies, no pie-in-the-sky hope, no promises of changing the world.

These are simple, real companies that have measurable value substantially in excess of their current stock price. They will not disappear; but will be here for many years to come. In years past, I have purchased turnarounds in computers, software, semiconductors, even biotech -- but not this year. This year, in my opinion, the safest and most prudent strategy is to order up plain vanilla -- and get real.

There is a common thread running through this list of companies below, as it runs through all legitimate turnaround situations: Business stinks! These are not the kind of companies that you will find Wall Street analysts fawning over. There is no way to sugarcoat it -- these companies have serious problems that they are struggling with.

Some of my best turnaround moves have been made when I had to pinch my nose, wince, cringe ... and buy. So it is with these companies. If you want to wait for a turnaround to occur, before investing, be prepared to pay 50% or more above current prices. It sounds trite, but it's true: Stock prices move before fundamentals improve.

All the companies below have the potential to double over the next one to three years. These stocks are selling, on average, at 30 cents on the dollar compared with their all-time high, with an average dividend yield of 2.5%. They have strong financial positions. They are real: There's only one thing left to do -- back up the truck and load up.

My Top Ten Turnaround Candidates for 2001
Stock	Current Price	All-Time High	Percentage Down from High
Circuit City (CC:NYSE)	$10.81	$65	84%
UAL (UAL:NYSE)	35.88	102	65
E*Trade (EGRP:Nasdaq)	7.34	72	90
H.B. Fuller (FULL:Nasdaq)	40.31	73	45
Raytheon 'B' shares (RTN^B: NYSE)	27.50	75	64
TRW (TRW:NYSE)	36.38	65	44
Georgia Gulf (GGC:NYSE)	15.00	59	75
Hasbro (HAS: NYSE)	10.06	37	73
Office Depot (ODP:NYSE)	6.94	26	74
J.C. Penney (JCP: NYSE)	10.25	79	87
Source: Baseline

Here's my take on each one of these potential turnaround candidates:

Circuit City (CC Quote - Cramer on CC - Stock Picks)

This consumer electronics retailer is priced as if the current sales slowdown is permanent. My bet? The cycle will turn later this year. Even if it takes a while for the consumer electronics cycle to turn, I'm not worried. In my 15 years in the business, I have never seen a retailer with a better balance sheet. Circuit City not only has no net debt, but this $2 billion company has well over $1 billion in net current assets. Expect this $10 stock, down from $65 earlier this year, to recover to at least $25 in the next year or two.

UAL (UAL Quote - Cramer on UAL - Stock Picks)

I love to buy companies beleaguered by a host of temporary problems. Invariably, they are bargain priced. UAL fits the bill, with a myriad of problems hitting them simultaneously -- union troubles, issues with their proposed buyout of US Airways Group (U Quote - Cramer on U - Stock Picks), high fuel prices, a poor economy and so on. When the cycle turns -- and it will -- this company has the potential to earn at least $10 a share, making this $35 stock worth $60 to $70. When will good times make a comeback at UAL? I have no idea -- but I can wait.

E*Trade(EGRP Quote - Cramer on EGRP - Stock Picks)

Even if I adjust my numbers for a bad market in 2001, I still believe E*Trade has normalized earnings power of at least 75 cents a share. Earnings are artificially depressed because E*Trade siphons off its rich cash flow (60% gross margins) for advertising in order to increase business. A huge hidden gem, though, is E*Trade Bank, which has come out of nowhere to become one the largest savings banks in the country, growing at an exceptionally high rate. The bank business alone is worth more than E*Trade stock. Expect a recovery in this stock to $20 or more in the next couple of years.

H.B. Fuller (FULL Quote - Cramer on FULL - Stock Picks)

Management has been struggling to buttress the prospects for this adhesives company in the face of higher petrochemical prices and a weak euro. The cost reductions put in place last year, and current falling petroleum prices should help Fuller's stock recover, and approach its old highs of $73. Fuller is the epitome of a "real company" -- looking at its financial history, it has always been profitable (even in recessions) and has increased its dividend for more than 15 consecutive years.

Raytheon

A player in the defense industry, Raytheon collapsed in the last couple of years from $75 a share to below $20 because of a number of problems. Assimilating the defense electronics businesses purchased from Hughes, Chrysler, Texas Instruments and others has not gone smoothly. But with a sizeable backlog in excess of $25 billion, expect this $9 billion company to experience strong earnings gains for the foreseeable future. The market is already sensing a turnaround at Raytheon as the stock has rallied from under $20 to around $27. A double from current levels in the next one to three years is a reasonable expectation.

To read Part 2, click here.