When you buy a stock that has been falling, you have the thrill of trying to catch the bottom and strive for maximum gains.
When you purchase a rising stock, you have the excitement of buying into an enterprise that is showing strength and generating excitement.
Intellectually, I believe it doesn't matter which direction a stock is moving when you buy it; all that counts is how good a value it is. Yet emotionally, I prefer buying stocks that have been declining.
I recognize that many investors, especially those schooled in the so-called relative strength theories of investment gurus such as William O'Neil, only buy stocks that have been gaining. So, roughly twice a year, usually in February and August, I write about stocks I like that are moving higher.
Here are four rising stocks that should appeal to value- oriented investors. All are up 10 percent or more this year, in contrast to the Standard & Poor's 500 Index, which is down about 4 percent.
American Capital Ltd., a private-equity investor and asset manager based in Bethesda, Maryland, is up about 100 percent this year. Think you missed all the action? Not in my opinion.
Bear in mind that American Capital shares rose to more than $37 in February 2007. When the financial crisis and bear market hit, the shares plunged to less than $1.
This year's leap has carried the stock to about $5, so it's easy to see considerable room for additional gains.
Restructurings to Increase
American Capital provides financing for buyouts of companies, sometimes by their own management, and also arranges mezzanine financing for newer enterprises. Mezzanine capital is the middle stage of financing that comes in between initial funding provided by venture capitalists and a public offering.
The times should favor American Capital for the rest of this year and 2011. My sense is that corporate restructurings of all types, including mergers and acquisitions, will increase in the next 18 months, driving demand for the company's services.
Even with its big percentage gain this year, the shares are by no means overpriced. The stock sells for less than book value, and for 11 times earnings.
ViroPharma Inc., a biotechnology company based in Exton, Pennsylvania, has increased about 53 percent this year. The company gets most of its revenue from Vancocin, an antibiotic that treats certain infections of the lower digestive tract.
No Competition
Analysts who like the company focus mainly on Cinryze, a drug to treat hereditary angioedema, or HAE, a rare genetic disorder can cause dangerous swelling. As an orphan drug, Cinryze has a legal monopoly until 2015. Orphan drugs are developed to treat rare diseases; they have a limited market yet manufacturers can set a high price for the drug and sell it without competition for seven years.
While most biotech stocks sell for high multiples of earnings, ViroPharma's price-earnings ratio is only 13. The biggest thing making me nervous about this stock is that nine of the 10 analysts who cover the company agree with my upbeat assessment. I prefer to move counter to the crowd, not with it.
NYSE Euronext, the world's largest stock exchange, was formed in 2007 when NYSE Group Inc. (parent of the New York Stock Exchange) merged with Euronext NV (a pan-European stock exchange). The New York-based company makes markets in some 8,000 stocks in the U.S. and Europe.
Its shares have risen about 12 percent this year. I believe the icy fear gripping equity markets in the U.S. and in Europe will thaw considerably over the next year. That should lead to increased trading and better profits for the company.
Glory Days
The company's profit was modest last year. Revenue in 2009 was little changed at $4.7 billion and net income was $219 million. That was better than the $738 million loss in 2008 during the height of the financial crisis. Still, the company's 2009 profit was only about a third of what it was in 2007, when the bottom line was $643 million.
Maybe the glory days won't return soon, but a profit of $300 million to $450 million seems reasonable. At 12 times earnings, with a dividend yield of about 4 percent, I think it is a good investment.
I'll close with something I don't write about too often, a restaurant stock. I like Darden Restaurants Inc., whose businesses include the Olive Garden and Red Lobster chains. Shares of the Orlando, Florida, company have risen in 11 of the 14 years since it was spun off by General Mills Inc. in 1995.
This year will probably be the 12th straight year of increased earnings, and the shares have advanced about 18 percent year-to-date.
Same-store sales at the company's restaurants open at least a year fell 5.3 percent in fiscal 2010, which ended in May. Better economic conditions would help sweeten the sour revenue trend. Yet even in the tepid economy of the past fiscal year, Darden was profitable and had a 23 percent return on equity.
Disclosure note: One of my clients owns shares in NYSE Euronext. Other than that, I have no long or short positions in the stocks discussed in this week's column, for clients or personally.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
