December 21, 1996 in Nation/World

‘Fallen Angels’ May Be Good Stocking Stuffer

Bloomberg Business News
 

Stock pickers, unlike Christmas shoppers, don’t have to wait until Dec. 26 to find half-priced bargains. Try stuffing a stocking with the shares of Telxon Corp., maker of hand-held wireless computers for tracking merchandise at cash registers and in warehouses.

The Akron, Ohio-based maker of cost-management tools tumbled last spring after telling investors it lost track of expenses. Telxon spent its last two quarters in the red, its first back-to-back profitless periods since 1993.

As investors bailed out, shares fell 66 percent to $9.75 by June 20 from a May 17 high of $28.13. Still, former shareholders’ loss looks to be others’ gain.

At about $12 a share, 1.3 times its assets and 0.4 times sales, Telxon is quite a bargain, said David Katz, president of New York-based Matrix Asset Advisors.

Telxon shares aren’t the only ones hanging on sale racks these days. Record heights in market averages mask severe declines in companies which came short of Wall Street’s forecast earnings. To illustrate how the gains of just a few companies can mask losses marketwide, 55.1% of this year’s 19.8 percent climb in the Nasdaq Composite index can be attributed to five stocks: Microsoft Corp., Intel Corp., Cisco Systems Inc., Oracle Corp., and MCI Communications Inc., according to the National Association of Securities Dealers.

Bottom-fishing investors said selected health care providers, electronic parts makers, cable companies like Cablevision Systems Corp. and retailers like Wal-Mart Stores Inc. have the best chance to right themselves in coming months.

At the same time, few said they saw any industries that could be candidates for the kind of gains realized by rejuvenated energy shares, this year’s recovery story.

Other value seekers said investors fail to realize the profitability of health care companies.

Greg Summerville, chief investment officer at Kirr Marbach & Co. in Columbus, Ind., has invested in a triumverate of health care companies. Mariner Health Group Inc., Maxim Medical Inc. and Manor Care Inc., Summerville said, are as depressed as drug stocks were earlier this decade, when President Clinton attempted to enact health care reform.

At least one of Summerville’s picks is not for the faint of heart. Mariner, an operator of rehabilitation sites, clinics, pharmacies and other health-related businesses, slid 53 percent this year, including a one-day, 44 percent swoon to $7.38 on Oct. 11. On the eve of that slide, the company said earnings would fall 20 percent below estimates because of lower Medicare payments. The next day, Merrill Lynch & Co. questioned the basis of Mariner’s earnings reports from previous quarters.

Even with that doubt, Merrill sees Mariner earning $1.10 a share in 1997, giving it a price-to-earnings ratio of 7.2, far below the 16.5 multiple accorded 1997 profits for companies in the S&P; 500.

Maxxim’s earnings are one of a few down-to-earth indicators investors must look at when analyzing depressed stocks, sometimes referred to as “fallen angels.” Cash on hand is at a premium.

Many of the these stocks - such as Sunglass Hut International Inc. and Veterinary Centers of America Inc. - were rapidly growing companies before earnings came short of forecasts. With their shares depressed, acquisitions paid for with stock are too costly, and investment banks are reluctant to raise funds through share offerings.

Kirr, Marbach’s Summerville said he would steer clear of low-priced Internet stocks. “There are a lot of companies which are valued on the basis that Internet commerce is going to be a real big thing,” he said. “It’s going to happen a lot slower than people think.”

Sometimes the best sale is no sale at all.


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