Chasing Value: Ten stocks for 2010 -- Part 3

Contenders

• American Eagle Outfitters (AEO)
• Anadarko Petroleum (APC)
• Anglo American ADR (AAUKY)
• Berkshire Hathaway (BRK.B)
• Diageo plc (DEO).
• EZCorp Inc. (EZPW)

E-Trade (ETFC) got burned when it decided to stick its fingers into the home mortgage business and compete with traditional banks. That fateful move (blunder) led to the stock tanking, just like the banks that they envied. The stock has been trading between $1.20 and $1.60 per share since the market bottomed in March 2009. Speculation has been rampant that the company has a high chance of being acquired. It seems that this a likely possibility, but when? For the last 18 months ETFC has been struggling to reduce its loan default exposure and the mark-to-market risk. This is the most glaring reason it has not been acquired already.

In December 2007 I posted Does E*Trade have a purpose? questioning whether its scale and features (and balance sheet) would win out against larger and better financed competitors. At that time it was trading around $4.30 per share. I think a stabilized company might be worth less than half that, perhaps $2.00 or close to it. That would be about a 30% premium. I think it could happen in the next twelve months, and this is why I have made it a contender.

Grubb & Ellis (GBE) came to my attention when I was screening for stocks trading under a dollar to see if I could pick out any potential survivors in the rubble. GBE is the primary real estate brokerage company I have been using for the last ten years. I did not even know the company was publicly traded. The stock crashed with the economy but the void of liquidity in the market hurt the real estate industry harder than most. Upon checking it out I noticed that the stock had traded as high as $18, but tanked rapidly and had a 52-week high of $5.00.

One of the important factors to me was that despite the fact that its bleeding cash, it had reduced the size of its losses for five straight quarters. It seemed like a survivor to me, so I loaded up at 60 cents a share. That worked out great because its 52-week high only recently achieved was $2.17. It has since settled back down trading around $1.50 for the past few weeks. That is fine with me considering that Boston-based Fidelity Fund manager, FMR, LLC announced it has taken a 13% stake in the company on November 10 and the company's quarterly earning report issued a day later indicated losses had been further reduced. If the stock gets back to its recent high in 12 months then there will be a 33% gain, but I think it can do better than that offering a broad range of services to a commercial market that still has a lot of turmoil.

On the Fence

• General Electric Company (GE)
  

Out of the Running

• Annaly Capital Management ( NLY)
  
• Intuitive Surgical Inc (ISRG)
• Wells Fargo & Company (WFC)

Avi BioPharma Inc. (AVII) was brought to my attention by Barron's weekly business journal (subscription required) and it is a highly speculative investment. The company, located in the Northwest, is capitalized at $165 million and has growing revenue, but it never has reported a profit. There is a lot of promise in its five or six drugs in the pipeline but since I have no way of knowing when, or if, those products will hit the marketplace this seems like a bad choice to out perform in 2010. Its shares, trading around $1.50, make it a small gamble for me but a three to five year time frame is more realistic to find reward.

American Oriental Bioengineering (AOB) is a CAPS favorite at Motley Fool and I have been watching it, but it is not that easy to get a handle on. From what I was able to gather it was originally an American company founded in Nevada and now based in China. It develops and distributes traditional herbal remedies, over-the-counter, and prescription drugs through 100,000 outlets in China. That is a story I like. However, the stock is very volatile with a beta of 1.74 and I have concerns about its business dealings and transparency. The stock is trading around $4.00 but its 52-week range is $4.50. This one could triple in the coming year but the gamble is to great to include in the coming years bets.

Stay tuned for Part 4 as we stroll toward December, when I will have to finalize the picks for next year.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares AVII, ETFC, GBE and options in AOB.