Stockpickr: 2007's Top Turnaround Stocks - TheStreet

Stockpickr: 2007's Top Turnaround Stocks

These beaten-down names show signs of improvement.
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Generally speaking, investors are an emotional bunch. Once burned by a stock, they don't want to get hurt again, so they stay away. Stocks that sell off probably sell off too much.

I'm certainly guilty of this type of reaction as well. For instance, if you mention

eBay

(EBAY) - Get Report

, my knee-jerk reaction might be "Skype was a horrible acquisition -- I'll never touch eBay," even though the effects of Skype are more than baked into the stock.

So I decided to look past all the emotions and set up a portfolio of my

top growth surprises

. These are stocks that have been beaten down over the past year because of somewhat overly irrational or pessimistic reactions by investors to various news events.

Yet, despite these news events, the names in this portfolio are expecting strong growth, and over the past four weeks, analysts have even been raising projections on them. In addition to these factors, I use two maxims from Jim Cramer's latest book,

Mad Money: Watch TV, Get Rich

:

  • Buy stocks growing faster than their sector; and
  • Buy stocks with a PEG (P/E ratio divided by expected growth) of less than 2.0.

Finally, as much as I like the fact that these are hot growth stocks, I like to see my favorite value investors own these names as well.

First on my list, actually, is eBay. As far as Wall Street is concerned, it appears as if eBay can't do anything right. Skype seems to be a failure for the company, although I believe that story is far from being played out completely.

One thing we do know is that nobody is using Skype to close transactions on eBay. That said, Skype continues to increase its usage. Whenever I call anyone abroad, it always seems as if I'm calling their Skype number.

Meanwhile, eBay exceeded or equaled analyst estimates in the past four quarters. Earnings are expected to grow to $1.28 a share in 2007 and $1.51 a share in 2008. Thirty days ago, the average analyst consensus was $1.23 a share, and 19 analysts have upped their projections to make the average $1.28 a share. With 20% expected growth, that means eBay should see more than twice the expected growth of the market. With a forward P/E of 22 and a growth rate of 20, the company's PEG is 1.1 -- well below the 2.0 criteria Cramer mentions in his book.

Traders are getting this all at a discount, as seen here:

eBay (EBAY)

The stock is down 15% over the past 52 weeks, although it's starting to break out now.

I'm not the only one who believes eBay is headed back up to $40 and higher. Value investor Prince Al-Waleed, who made the bulk of his fortune on value plays in the early 1990s such as AOL and

Citigroup

(C) - Get Report

, is also an owner. Check out the rest of

Prince Al-Waleed's holdings

.

Also holding eBay is Bill Miller's

Legg Mason Value Fund

and

Berkowitz Capital

, the hedge fund formerly known as Cramer Berkowitz. Click on the links for each fund name to see their top holdings.

Another candidate for the

top growth surprises portfolio

is

Applied Materials

(AMAT) - Get Report

. Over the past 52 weeks, the stock has been down almost 10%.

Yet the company is expected to grow earnings 35% over this year, to $1.14 per share. It's worth noting that 30 days ago, analysts thought the number for the year was going to be $1.13 per share. While that's not a huge upward revision, at least it's in the right direction!

At earnings of $1.14 a share and at the current price, Applied Materials will be trading at a 13 P/E. It's almost as if Wall Street thinks the company is on the verge of bankruptcy. The issue here is that everyone has a knee-jerk reaction against the chip stocks: "It's a commodity," "It's a tech bust," "I don't understand it," etc. But Applied Materials has $1.5 billion in net cash and $2.73 billion in cash flows over the past year. Even without the 35% expected growth, this is a leveraged buyout waiting to happen.

And, as I'm fond of saying, I'm not the only one who thinks so. Third Point, one of the best deep value activist funds, owns Applied Materials. I bet the fund never touched tech a few years ago, and now Applied Materials is in deep value territory. Check out

Third Point's top holdings

. Since 1995, the fund has been up 28% per year, and it is also on my list of

activist hedge funds

I like to piggyback.

Oddly, the PowerShares WilderHill Clean Energy Fund is also an investor in Applied Materials. It invests in companies focusing on "greener and renewable sources of energy" -- go figure.

Click here

for some of its other top picks.

Other stocks making the grade in the top growth surprises portfolio include

KLA-Tencor

(KLAC) - Get Report

,

Papa John's,

(PZZA) - Get Report

and

Aetna

(AET)

.

Click here

to see the full list of companies in the portfolio.

Stockpickr tip of the day

: I believe 2007 and 2008 will be the years for growth stocks, and I say this for a couple of reasons. Everyone got burned by growth back in 1999 to 2001, and in 2002 growth was firmly burned out of our collective investment consciousness. I'm afraid to touch growth. If a company owns a bunch of trucks and you can take them apart and value what the liquidation is worth, then fine. But growth -- who knows?

This year it's different. Five years is what it takes to forget the horrors of the growth depression. Not to mention the fact that there's a whole new crop of hedge fund traders graduating from business schools. Also, it's worth noting that many growth indices (Value Line, in particular) actually have lower P/E ratios than their value counterparts.

For a broad survey of the growth universe, use the Stockpickr

search function

to search for the term "growth." You'll find 15 pages worth of portfolios mentioning growth in their titles, and it's worth browsing through them.

Incidentally, several people have asked me what its costs to use Stockpickr. Unlike most things in life, it's free!

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 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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