Ready to Bounce: 12 Stocks for the Year Ahead

MANY INVESTORS ARE painfully aware that the solid showing of most major U.S. equity indexes last year masked poor performance in certain industries, including home builders, airlines, cable TV, newspapers, retailing, apparel, real-estate investment trusts and, most visibly, financials.

What did badly in 2007 might do well in 2008, because valuations in many depressed sectors are at multiyear lows. Single-digit price/earnings ratios are common in the financial sector, and stocks in many industries are trading at or near book value, a level that often proves to be a floor beneath stock prices.

We've come up with a list of a dozen stocks that fared poorly last year but could enjoy a bounce in 2008. A diversified group, they include such well-known names as American International Group, Bear Stearns, Comcast, Gannett, Southwest Airlines, Starbucks and Time Warner.

More aggressive investors may be tempted by home builders, which fell an average of 60% last year, the worst showing among the 147 industry groups in the Standard & Poor's 500 index.

David King, who runs the Putnam New Value fund, says that investment managers, particularly those with a value bent, essentially have one decision to make for 2008.: "Do you want to take risk relative to the U.S. consumer economy and the crisis in the mortgage market?"

King, whose 2007 performance suffered as a result of his exposure to financials, thinks 2008 will be much better for that group. A holder of stocks like Bear Stearns, Countrywide Financial (ticker: CFC) and mortgage insurer MGIC (MTG,) he says that major rallies can come quickly when investors sense a bottom. Just look at the nearly 50% gains from their November lows by Fannie Mae (FNM) and Freddie Mac (FRE) after they quickly raised capital.

Here, then, is a rundown on the dozen stocks.

American International Group (AIG): Subprime-mortgage concerns have depressed shares of the world's largest insurer. AIG does hold $25 billion of subprime loans, but management insists the portfolio isn't toxic. The problem may be distracting investors from the value of AIG's global franchise, including its overseas life-insurance unit, its crown jewel. At 56, AIG trades for 1.4 times book value and about eight times estimated 2008 profits of $6.69 a share. Rarely in the past decade has it traded so cheaply relative to book value and earnings. If AIG can earn anything close to that $6.69 a share this year, the stock could hit $75 by year end.

Bear Stearns (BSC): At around 80, the stock is trading below book value -- now $84 a share -- for one of the few times since the company went public in 1985. There has been plenty of bad news from the firm, including a loss of almost $7 a share in its November quarter as a result of write-downs of mortgages and other trading assets. Wall Street fears that there's little value left in Bear's bond-oriented franchise and that the risk remains of more big write-downs. Yet the firm has a history of adapting and making money. The valuation gap, moreover, between it and its closest rival, Lehman Brothers (LEH), rarely has been wider. If the worst is over at Bear Stearns, the stock could easily top $100 in the next year, and it might become a takeover candidate.

Comcast (CMCSA): The country's leading cable operator has seen its stock fall 25%, to below 18, since it issued disappointing 2007 guidance in October. The Street now worries about persistently high capital spending and video competition from Verizon Communications (VZ). But Comcast is valued at less than six times projected 2008 pretax cash flow and at just $3,000 for each of its 24 million cable subscribers, down from $4,000 a year ago. It is on course to generate $3 billion of free cash flow in 2008. One key issue is what the controlling Roberts family will do with that cash. Comcast, which now pays no dividend, could become a high-profile target for activist investors if the stock continues to languish.

Comerica (CMA) and SunTrust (STI): Regional bank shares have been pummeled in the past year as rising loan losses have depressed profits. The result is historically high dividend yields. Midwest stalwart Comerica, now trading around 41, yields 6.2%. It trades for less than 10 times earnings and for 1.3 times tangible book value, one of the lowest price/tangible-book ratios among regional banks. SunTrust, now quoted near 60, yields 4.9%. It trades for 11 times projected 2008 earnings and for two times tangible book. A year ago, Atlanta-based SunTrust touched 90 on takeover hopes. The takeover premium is gone, but the allure of its Southeastern franchise remains. SunTrust's CEO in the past year, James Wells, hasn't wowed Wall Street, making SunTrust one of the industry's prime takeover targets.

Gannett (GCI): Few sectors are more shunned now than newspapers. That's reflected in the valuation of industry leader Gannett, whose shares, at 36, trade for eight times earnings and yield 4%. An underappreciated asset is its TV business, which could be worth $4 billion, or $17 a share. Strip that away, and investors are paying only five times pretax cash flow for Gannett's newspapers. If the stock continues to struggle, pressure could mount for a higher dividend.

Kohl's (KSS): The stock has suffered from the Wal-Mart syndrome -- rising earnings but a flat stock. Kohl's , now trading around 43, is at the same price as in early 2000 despite a tripling in profits. The consumer and economic backdrop is tough, but Kohl's arguably is the country's best-run chain of department stores. After tripling its store base since 2001, Kohl's still is growing. If the consumer economy doesn't fall apart this year, the stock, now trading for little more than 10 times estimated 2008 profits, could be much higher by year end.

Legg Mason (LM): Hurt by star fund manager Bill Miller's second straight terrible year, Legg Mason has suffered outflows from its stock funds. The company also has been hurt because its money-market funds are exposed to so-called SIV investments, resulting in a possible charge of $300 million. But the firm now has one of the lowest valuations in the asset-management industry. At about 70, the stock trades for 12 times estimated profits of $5.61 a share in its fiscal year ending in March 2009. Legg Mason has a forward P/E of just 10 based on so-called cash earnings, which adds back goodwill amortization and a tax benefit. With a $9 billion market value, Legg is valued at just 1% of its $1 trillion of assets under management, versus 2% to 5% for most if its peers. One 2008 catalyst could be the naming of a successor for longtime CEO Chip Mason, 71.

Micron Technology (MU): The big maker of DRAM and NAND memory chips continues to lose money and confound value investors. The good news is that the stock is near a historically low valuation relative to book value and sales. At 7, Micron Technology is valued at 73% of book value and at about 85% of tangible book. Ultimately, the DRAM market may get rational -- like the disk-drive market -- and produce profits for industry leader Micron.

Southwest Airlines (LUV): In the volatile airline industry, Southwest has been consistently profitable in good times and bad. It boasts the sector's best balance sheet, strong management and a fuel-hedging program covering 70% of its estimated 2008 needs at an oil price of just $51 a barrel. The stock, now around $11.50, is below where it stood after Sept. 11, 2001. Southwest could pick up attractive assets cheaply if rivals flounder.

Starbucks (SBUX): Just a year ago, Starbucks traded close to $40 and was considered unstoppable. Now deemed a busted growth story, it trades around $18. Growth investors have bailed out, and many value investors consider the stock to be too dear at 18 times forward earnings. Yet profits still are growing at a 15% clip. There could be rising pressure on management to scale back Starbucks' rapid domestic expansion in the face of cannibalization and falling returns. If Starbucks shifts gears as McDonald's did a few years ago, the stock could benefit.

Time Warner (TWX): Three factors explain why Time Warner's stock, around 16, is back where it stood in 2003. Big media are out of favor. So is cable. Then there is uncertainty about whether new CEO Jeff Bewkes is interested in splitting up the company. A big issue for 2008 is whether Bewkes decides to spin off the company's 80% stake in Time Warner Cable to its shareholders. Spin off or not, Time Warner trades for only 15 times estimated 2008 profits and seven times projected 2008 pretax cash flow. UBS analyst Michael Morris carries a sum-of-the-parts value of $21 a share. Time for Carl Icahn to rattle the cages again?