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STOCKS
Blooming Bargains
by Jeffrey R. Kosnett
Want to hitch your wagon to Warren Buffett? For $85,000, you can buy a Class A share of the Oracle of Omaha's Berkshire Hathaway. Or you can buy a B share of Berkshire for a mere $2,800. But let's face it: Not only does Berkshire Hathaway come at a stiff price, it is a large company that will, at best, grow only moderately. What are the chances of doubling your money in a year or two in Berkshire? Slim to none. If high prices are a turnoff, we might have what you're looking for: a collection of companies whose shares sell at single-digit prices and have the potential to run rings around Berkshire. The companies are generally small, which means they're capable of growing more quickly, and the slender share prices make the stocks easier to push up. Consider Ispat International, a global steel producer, whose stock traded below $1 in 2001 and is now $38.
We don't claim it's easy to identify potential 38-baggers, and there are a few points to consider before you engage in extreme bargain hunting. First, this is speculating, not textbook value investing. "You don't buy a $5 stock to make 20%," says Eric Beder, an analyst for J.B. Hanauer & Co., a brokerage in Parsippany, N.J. "You buy it to go to $10. Or $40."
Second, if the main engine that drives a company's profits doesn't rev up, the stock is unlikely to take off. Ispat soared when steel markets rebounded. By contrast, Sun Microsystems seems unable to develop meaningful new products. Sun isn't cheap even at its current price of $5.
Third, there are lots of reasons for stocks to dive into single digits. It could be management turmoil, an accounting flap or a product misstep. But blemishes do fade. That's what we expect will happen with our five un-Buffett-like stocks.
Bouquet beauty
By the standards of Internet flameouts, the shares of 1-800-Flowers.com (FLWS) look downright stodgy. After going public in 1999 at $21 a share, the stock edged up to $23 but has since wilted by some 60%, to $9 in mid December -- a relatively modest decline for a dot-com.
Chief executive officer James McCann's explanation for the drop is simple enough: McCann projected 8% to 10% yearly sales growth, but the company has been generating growth of only 7% to 8%.
McCann started the business with a single flower shop in New York City in 1976. He increased the number of stores, bought a company called 800-Flowers to move into the flowers-by-phone business, and in the late '90s began selling over the Internet. In 1999, the company added ".com" to its name.
In McCann's view, Flowers is ready to, er, flower. For one thing, Web business now represents more than half of sales, and the proportion is rising. That's key, because online buyers not only can see fancy floral arrangements but also can browse higher-profit temptations, such as gourmet popcorn and cakes. That advances McCann's plan to transform Flowers from merely a florist to a merchant of a wide variety of gifts.
If McCann is right, sales will accelerate, and the size of an average order will rise -- as will the profit for each dollar of revenue. According to Thomson First Call, analysts, on average, see the Westbury, N.Y., company earning 26 cents a share in the fiscal year ending June 2005, down from 31 cents the year before. But they forecast 36 cents a share for the June 2006 fiscal year, and Beder, the Hanauer analyst, sees earnings rising 30% annually for several years. That could allow the stock to revisit its old high.
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