Investing's ABCs: How to Profit From Single-Letter Stocks

It might sound crazy, but this stock-picking system works.
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Who says stock-picking is hard work? It could be as easy as Agilent (A) - Get Report, Barnes (B) - Get Report, Citigroup (C) - Get Report -- the first three stocks, alphabetically speaking, with single-letter ticker symbols.

It's assumed that any company with a much-desired single-letter ticker symbol must be a stable, established enterprise. You can check out a list of all of the

single-letter stocks

at Stockpickr.

I proposed this portfolio to Jim Cramer in a recent video for TheStreet.com TV in which we agreed the list contains some potential strong plays despite the seemingly frivolous aspect of the idea.

A company needs to have been there, done that and lived to tell the tale before earning the single-letter designation. Such a company needs to demonstrate some staying power -- think of

United States Steel

(X) - Get Report

, which was founded in 1901 by Andrew Carnegie and an original

Dow Jones Industrial Average

stock. And while some of the single-letter companies -- think

Ford

(F) - Get Report

-- may have hit a rough patch, that doesn't mean they might not be turnaround candidates.

Citigroup's

C

belonged to Chrysler before the Germans took over the automaker. Gillette was

G

until

Procter & Gamble

(PG) - Get Report

acquired it. Before Gillette,

G

belonged to Greyhound, at a time when bus travel was almost luxurious. But no company starting with the letter

G

has been found worthy of that single-letter designation in the two years since Gillette last traded on the

NYSE

.

Perhaps there are some hidden nuggets in this strategy. As the conversation proceeded, Cramer got excited by a few of the symbols. In the end, it became clear that the "ABC" strategy just might the beginning of a dynamite portfolio. I thought it would be a great idea to summarize the conversation, adding some of my own ideas to the mix.

As the King in

Alice in Wonderland

said to the White Rabbit when asked where to begin: "Begin at the beginning and go on until you come to the end. Then stop." So we'll start with Agilent.

Agilent is a spinoff of

Hewlett-Packard

(HPQ) - Get Report

. It actually was the company's core Test and Measurement business, started by William Hewlett and David Packard in their garage in 1938. Agilent sold the underperforming part of its Test and Measurement business to

JDSU

(JDSU)

.

Agilent trades at less than 8 times EBITDA, with some $500 million of net cash. Cramer believes Agilent is "a wonderful little company" and he wouldn't be surprised if we were greeted one morning with the news that it had been acquired by the Texas Pacific Group hedge fund.

Cramer sees Agilent as similar to

Medtronic

(MDT) - Get Report

in that while both stocks have not gone up since 2000, they're both fantastic businesses poised for a breakout. Medtronic made the

Ultimate Stock-Picker's Watchlist

because it's growing at 18.4% per year but the market hasn't recognized it.

In an interview with Craig Hester on

CNBC's

"Street Signs," Cramer said he was amazed at the number of companies that make great buyout candidates because of their fantastic, unrecognized growth. In addition, he spoke with Gary Loveman, president and CEO of

Harrah's Entertainment

(HET)

, who told him that 20% of the time of a public company's CEO is wasted. Because of that, Cramer believes that spun-off divisions such as Agilent are better businesses when run as a separate company.

Agilent appears to be in a situation similar to Phelps Dodge, which was acquired by

Freeport McMoRan

(FCX) - Get Report

in what Cramer characterizes as a "public leveraged buyout." Cramer continued: "People have to stop thinking that this is a bubble and think about all the undervalued companies out there."

Moving on to Barnes Group, I believe B is a great stock. Think of it this way: All of the unprofitable, heavy-debt dot-com stocks evaporated after the late '90s. However, the "picks and shovels" companies like certain Internet-technology-services and chip companies ended up surviving and even flourishing.

Barnes, an industrial-goods manufacturer, is a "picks and shovels" name and is like the 1850s equivalent of the dot-com boom, the railroads. In the California gold rush, the long-term winners were not the gold miners but the people, like Abraham and Straus, who furnished the gold miners with the picks, shovels and jeans they needed.

Barnes supplies the parts, not only for railroads, which are enjoying a resurgence -- see the

Warren Buffet Railroad Plays

and

Carl Icahn

portfolios on Stockpickr -- but it does so for jet engines as well. And now that we see

Boeing

(BA) - Get Report

is doing very well and Buffett, Icahn and other super investors are buying up all the railroad companies, I believe we are seeing a boom here for Barnes. China needs their goods, which means we have to upgrade our railroads and jet engines to get it to them.

Plus, Barnes looks cheap. I like to look at a couple of factors to define

cheap

. A critical one is enterprise value (EV)/EBITDA, with EV standing for market capitalization minus net cash. If EV/EBITDA is less than 7 or 8 (or even 10), it's cheap enough to be a takeover target by a private-equity firm. Barnes isn't cheap along those lines --its EV/EBITDA is 10.7 -- but with a forward price-to-earnings (P/E) of 13, I'll bet it's getting close to that.

Next I like to see who owns the stock. Except for the

Royce Opportunity Fund

(RYPNX), even the pros seem to have ignored such an obvious winner. Also interesting is the stock's 17-day short ratio. I'm not sure why people are bearish on Barnes. To do your homework to decide whether Barnes is a short-squeeze candidate, compare it to stocks on Stockpickr's

10 Short Squeezes

portfolio.

Cramer agrees with me that Barnes is a backdoor to rail parts and aerospace. He compares Barnes to

Koppers

(KOP) - Get Report

-- a terrific rail play.

As for Citigroup -- is there anything left to say about it? Cramer describes C as "the most perpetually undervalued company in the USA." Ever since hedge fund manager Eddie Lampert invested in the financial services firm a few weeks ago, there's been nonstop talk about the next step, including

my recent commentary

at

TheStreet.com

.

Will Lampert engineer a coup, replacing Chuck Prince, who's on Jim Cramer's "CEO Wall Of Shame," with Bob Rubin to shake things up? I asked Cramer that exact question. He believes Lampert has enough on his plate with restructuring

Sears Holdings

(SHLD)

and that his purchase of 15 million shares in Citigroup is just a convenient place to park his money.

In addition to

Edward Lampert's portfolio

, other prominent portfolios that include Citigroup are

Atticus Capital

,

Yale Capital

,

Dogs of the Dow

and

Mellon Financial

.

I'm not so sure that Lampert will stay a passive investor, unless Citigroup is run exactly to his specifications. He just doesn't have a history of being a passive shareholder. A more likely scenario, I believe, is that he's biding his time until he straightens out Sears.

The

Single-Letter Stocks Portfolio

was created by Pam, a Stockpickr subscriber who uses the Web site to generate new, solid investing ideas. For starters, check out

Top Dividends Stocks You've Never Heard Of

,

Takeover Targets

and

Mad Money Buybacks

.

If you haven't checked it out yet, please try out our newest feature,

Stockpickr Answers

. You can ask questions and answer them, and you can see the

"Top analysts"

as well as

Jim Cramer's latest answers

.

Stay tuned for Part 2 of this article, in which I'll discuss the next batch of single-letter stocks.

At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.

James Altucher is president of Stockpickr LLC, a wholly owned subsidiary of TheStreet.com and part of its network of Web properties, and a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of

Trade Like a Hedge Fund

and

Trade Like Warren Buffett

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;

click here

to send him an email.

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