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Scuffling Apple looks lucrative

| Tuesday, Jan. 15, 2013, 12:01 a.m.

Banged-up stocks often make the best buys.

I like to buy stocks on bad news that is real but temporary. That's why, each quarter, I publish a Casualty List of wounded stocks that I think will recover.

Apple Inc. and Exelon Corp. are both on the Casualty List at the moment. I also recommend GTAT Advanced Technologies Inc. and Finish Line Inc.

Each of these stocks was down 15 percent or more in the fourth quarter. The overall market was close to flat while Congress dithered over taxes and the budget.

Buying on bad news has been powerful approach over the years. I've compiled 39 Casualty Lists, beginning in mid-2000. One-year results can be calculated for 35 of the lists. Of those, 25 have been profitable and 23 have beaten the S&P 500.

The average 12-month return for my Casualty List stocks has been 23.8 percent, versus 7.3 percent for the S&P.

Bear in mind that column results shouldn't be confused with the performance of real-money portfolios I run. Column results are hypothetical and don't reflect trading costs or taxes. Also, past performance may not predict future results.

Running counter to the long-term trend of good results, the performance of my list from one year ago was a fiasco. Three of the four Casualty List stocks I recommended in January 2012 have declined, with the worst disaster coming from RadioShack Corp., down 76 percent.

Only Oracle Corp. did well, rising more than 27 percent. Newmont Mining Corp. (which I owned for clients) and Chesapeake Energy Corp. were in the loss column.

Overall, the fourth-quarter 2012 list fell 22.3 percent, while the S&P 500 was up 16.4 percent.

Undaunted, I offer four new selections.

The first one – Apple (AAPL) – may shock some people. In the past couple of years, I haven't been a fan of this stock because it seemed to me that everything that could possibly go right for the company had done so.

Now, however, investors are worrying about whether Tim Cook can fill the late Steve Jobs's shoes and fretting whether all the new tablet computers coming onto the market will eat into Apple's dominant market share. Apple fell 20 percent in the fourth quarter.

That leaves it at 12 times earnings, a mighty attractive multiple for a stock whose earnings have grown 43 percent a year in the past five years.

Apple is debt-free. It has more than $10 billion in cash or near-cash and $18 billion in marketable securities, as of Sept. 30. Its iPhone, iPod, iPad and Macintosh are products that people want.

I don't suppose things can keep going as swimmingly for Apple as they have. But if the growth rate is cut in half, to 21 percent, the stock still looks like a reasonable purchase at 12 times earnings.

Exelon Corp. (EXC) is a Chicago-based utility that I've owned in the past and may again. From 10 power plants in Illinois, Pennsylvania and New Jersey, it generates about 20 percent of all nuclear energy produced nationwide.

I'm a proponent of nuclear energy. Despite its obvious risks, it can mobilize a great deal of power without the air pollution hazards of oil and coal.

Shares were sliced 16 percent in price last quarter because the company said it may need to cut its dividend in order to preserve its investment-grade credit rating. The dividend yield right now is a fat 7.2 percent.

GT Advanced Technologies (GTAT), based in Merrimack, N.H., makes furnaces used to manufacture purified silicon for solar panels and furnaces used to make artificial sapphires for LED (light emitting diode) lighting. Its shares dropped a hideous 44 percent in the fourth quarter.

GTAT's business is in the tank because there is a worldwide glut of solar panels, so hardly anyone needs to buy the equipment to make more. However, the artificial-sapphire business is in better shape. And the company should be able to withstand tough times, given $479 million of cash on the balance sheet.

Investors have oversold GTAT, in my opinion. It trades below book value and at about three times earnings, dirt cheap.

I'll finish with Finish Line of Indianapolis, which reported a quarterly loss and dropped 17 percent in the fourth quarter. This retailer sells athletic shoes and active wear. Its new website flopped, and it apparently had too many running shoes in stock and not enough basketball shoes.

Those seem like fixable problems — and this company is no slouch. Its five-year earnings growth rate exceeds 20 percent, and it has been profitable in nine of the past 10 years (all except fiscal 2008).

John Dorfman is chairman of Thunderstorm Capital and a syndicated columnist;

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