3 Beaten-Down Giants Ready to Rebound

Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's Bob Walberg joined NBR on Monday (watch video and read transcript here) to reveal his favorite beaten-up stocks.

Buying stocks is as much about timing as it is about research. It's important to do your homework and find stocks that meet your investment criteria, but even then you might be in for tough times if you don't pay at least some attention to timing. Psychology plays a critical role in determining a stocks price, and if you like to buy stocks at a good value, as I do, then you want to make sure to spend considerable energy on ascertaining a proper entry point.

Most of us have heard the phrase, "don't try to catch a falling knife." What this pithy little phrase means in the investment world is pretty obvious: If you buy stocks that are falling, you might get cut and bleed out before the stock bottoms and starts to go back up again.

Here's the problem for the value investor -- opportunities generally arrive from the fact that the stocks we are interested in are out of favor. They are losers for one reason or another. So we want to find stocks that are out of favor but not likely to keep falling -- or at least not much further.
Word on the Street

That's the key to playing the value game successfully. If your timing is wrong, you might find a great company that has temporarily fallen out of favor and therefore seems like a good buy. However, if the stock goes down another 20-25%, you're probably going to get washed out before the turnaround takes place and the real money is made.

So with the market having been on the defensive since May, there are a number of stocks trading well off their 52-week highs. It's a value hunter's paradise -- if you are patient and if you find stocks where the selling is largely exhausted.

I've identified three such bargains that I want to share with you now. Mind you, all of these stocks are down big from their highs and are not the names you are apt to hear mentioned on programs like "Fast Money" or "Mad Money." But for investors interested in making serious money over the next 12-18 months, these beaten-down giants have great potential.

My favorite dog right now is Best Buy ( BBY). This big box retailer is trading at 0.18x sales -- a huge discount to its peers and the market. Normally when you see a price-to-sales ratio this low it means investors are pricing the stock for bankruptcy. Now BBY has had its troubles, but bankruptcy is not in its future. Management is rethinking the game plan and is focusing on downsizing stores and rethinking its pricing strategy.

While this isn't likely to be a banner holiday season due to the lack of "must-have" products, the same-store sales comps are easy and expectations are so low that even a mild upside surprise could trigger a nice recovery rally. With the sellers washed out, downside risk from here is minimal, and with even modest success this stock could easily be up by more than 50% over the next 12 months.

Hewlett Packard ( HPQ) is another stock everyone loves to hate right now, but this is a great franchise selling at a steep discount to the market and its peers. While the jury is still out on the decision to name Meg Whitman as the new CEO, I think it was an inspired choice.

This is a situation that will take time to unfold, but the balance sheet is relatively strong, and the valuations are so cheap, that with a new management team I'm willing to bet the stock's potential gains from here far outweigh the downside. I would be a buyer with an 18-month target of 40-60% growth.

Finally, I think the worries of a global recession are being overstated at the moment, so the opportunity to buy Caterpillar ( CAT) at about 8x estimated earnings and 35% off its recent high is just too good to pass up.

If the economy falls into a deep recession, this pick would probably prove to be a bad one, but I don't see much chance of that at this point, and the recent selling has already discounted a mild recession.

Again, the downside risk from here seems limited. Conversely, if the numbers prove better than expected, this sector leader will quickly move back to its highs. Meanwhile, you get to collect a nice little dividend of 2.4%. Not bad.

>>To see these stocks in action, visit the 3 Beaten-Down Giants Ready to Rebound portfolio on Stockpickr.  

Robert Walberg is chief market strategist and editor of Premium Products at TheStreet. Prior to joining TheStreet, Walberg was founder and president of Chartwell Asset Management, a financial advisory company. Before founding Chartwell, he worked as a financial analyst and columnist for MSN Money from 2003 to 2008. Walberg was on the founding team at Briefing.com from 1996 to 2003, working as chief equity analyst, formulating the company's near-, intermediate- and long-term market positions. He was regularly quoted by The Wall Street Journal, Bloomberg, Reuters and Investor's Business Daily and made guest appearances on Fox Business, CNBC, CNN, ABC World News and The Daily Show with Jon Stewart. Walberg received a bachelor's degree in political science from the University of Illinois.

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