Turned Down for Turnaround

Alsin rejects reader nominees for next year's turnaround list, and explains why.
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I asked and you answered.

At last count, readers emailed 582 different ideas for the Top-10 Turnaround list for 2002. Here are the most frequently mentioned, and why I have excluded them from consideration.

I know I'm going to step on a few toes with my comments below. Just because I'm not buying these stocks doesn't mean there aren't some big winners here. I'm sure there are a couple that will end up being multibaggers. But in each case, I think there is enough uncertainty about a turnaround to pass on the opportunity. I've included Friday's closing price for each stock so you'll have some basis for my comparison.

Do you have a turnaround idea that you would like me to consider? There is still time to

send me an email with your recommendation for the Top-10 Turnaround List for 2002. I'll read and consider every idea.

See my recent column to see what kind of stocks I'm looking for.

For now, here are the stocks that didn't make the cut:

Ariba $3.08

Ariba's

(ARBA)

balance sheet is strong, but the same is true of its competitors, meaning the competition has staying power.

What will normalized margins look like? It's a guess at this point. Because of Ariba's short operating history, its future is highly unpredictable.

The swift decline in the revenue base -- with no end in sight -- makes this a gambler's stock.

Lucent $6.95

Lucent's

(LU)

balance sheet is undergoing tremendous improvement, especially with the sale of the fiber-optic cable business for $2.75 billion.

Industry fundamentals suggest net margins are likely to drop to 1994-1996 levels, which would put the value of this stock in the $3.50 to $4.50 range.

Global Crossing $1.08

Global Crossing

(GX)

is one of the most oft-mentioned turnarounds from readers. I'm sorry to say that, absent a sudden upturn in demand and improved pricing, the debt load is far too high to make a bet on the equity.

Sun Micro $11.88

Sun Micro's

(SUNW) - Get Report

normalized margins suggest a share price in the $5 area. The shares are priced as if we are headed for a major rebound in demand.

Sun's competitors have staying power, suggesting overcapacity is likely to linger.

EMC $13.09

Lots of competitors (both new and old) continue to put pressure on

EMC's

(EMC)

business, so I think it is unlikely to revisit recent peak margins.

Even a reversion back to old operating levels puts EMC's value at only $10 per share. A further decline in margins, a real possibility given the current pressure on prices, would be much worse for the stock.

Rite Aid $5.80

Rite Aid

(RAD) - Get Report

is No. 3 in a crowded space. The company's still-heavy debt load makes its turnaround a challenge. A decent level of profitability will take time.

With the large increase in shares outstanding, I can't justify a quote north of $6 per share, even if I were expecting a return to reasonable margins.

Mattel $18.93

Mattel

(MAT) - Get Report

may appeal to some because it is down a lot from a 1998 high of $46. But since then, revenue is lower by 27% and the number of shares outstanding has swelled by 43%. The stock looks fairly valued to slightly overvalued with a price-to-earnings ratio of about 20.

With little margin and sales leverage, I'm forced to fish in another pond.

Scientific Atlanta $21.86

Scientific Atlanta's

(SFA)

recent move to more than $20 makes its valuation less compelling.

Margins are still considerably high, relative to historical levels. The lingering supply of product is likely to put pressure on the bottom line.

The downside makes it too risky.

Carnival $23.57

Carnival

(CCL) - Get Report

is a reasonable turnaround candidate. Long-term net margins and growth rates suggest fair value in the $27 to $35 range.

However, the large debt load is a concern, and could choke the company if travel weakness persists.

Goodrich $22.17

Goodrich

(GR)

could be a value-trap; shares look cheap by all metrics, and Goodrich is paying a hefty dividend as well.

Ongoing asbestos litigation represents a liability that I can't measure with confidence, so I have to pass.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment adviser specializing in turnaround situations. At time of publication, Alsin held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to

arne@alsincapital.com.