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How to Identify and Profit from Undervalued and Beaten Stocks

Do you remember the Three Guys Department Store chain? Probably not. They declared bankruptcy, and faded into oblivion, some years back.

Prior to bankruptcy, their stock had made good money for early investors. It then stabilized to rise and fall with the market as such unspectacular issues seem to do.

That is, until news of their impending bankruptcy leaked out, and a desperate race ensued as panicked investors rushed to dump their shares of the plummeting stock before it hit rock bottom. Soon it was worth mere pennies per share.

Then, to the amazement of most, something unusual happened. A few knowledgeable investors made an incredible discovery and began to buy up every available share.

Though the founders of this huge chain of discount department stores were terrible at merchandising and management, they had done one thing very right. They had purchased each of their many new store locations before going into business.

That's right. By the time they went into bankruptcy, they owned every single one of their stores, free and clear, on some of the most prime commercial real estate in America.

Liquidated... the company was worth a veritable fortune! Not one creditor lost a dime. The principals walked away wealthy. And, an unbelievably small investment would earn millions of dollars for each of its new stockholders... in a very short time.

This is but one example of the thousands of undervalued and depressed stocks that have earned fortunes for those lucky enough, or smart enough, to discover them.

For, in truth, such inexpensive, highly leveraged issues have always excelled far beyond the market averages... leaving the DOW... S & P... and even the NASDAQ in the dust!

What does today's market offer the wise investor?

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February 2005:   MARKET OVERVIEW

January Slump Dampens New Year Optimism

According to the late poet T.S. Eliot, “April is the cruelest month”. Well, January can be pretty lousy, too. The weather is usually bad, the holiday bills come pouring in, and well-intentioned New Year’s resolutions are broken by mid-month. But even with all its winter gloom and post-holiday blues, January is usually a good month for stocks -- usually, but not so in 2005.

As January comes to an end, the Standard & Poor’s 500 stock index is down more than 2%, the Dow Jones industrial average has fallen around 1.45%, and the NASDAQ has lost nearly 2%. And depending on what pundit you listen to, the January slump, while not totally unexpected, may or may not be harbinger of things to come in 2005.

Even though the stock market was bearish in January, the major economic news was, at least heartening. While economic growth slowed somewhat down the home stretch in 2004, it still expanded at a respectable (although weaker-than-expected) 3.1% annual pace. That’s the slowest pace since the beginning of 2003, but for all of 2004, the economy grew at its fastest clip since 1999. And that’s a good sign that recovery is on solid ground.

The latest gross domestic product figures released by the Commerce Department showed that the GDP increased by 4.4% last year. That was up from 3% in 2003 and it marked the best showing since 1999, when the economy grew by 4.4%. Consumer spending in the fourth quarter increased at a brisk 4.6 percent annual rate, following a 5.1% growth rate in the preceding quarter. For all of 2004, consumer spending rose by a healthy 3.8%, the strongest showing since 2000. And in case you didn’t know, consumer spending accounts for about two-thirds of all economic activity in this country. That means that consumer spending plays a major role in the growth (or lack thereof) of the economy.

In a separate economic report, the U.S. Dept. of Labor said that employment costs rose at a “less-than-expected” rate in the final quarter of 2004. The employment cost index rose 0.7% in the last three months of 2004, as salaries and wages grew at their slowest rate in almost six years. There was, however, some encouraging news on the jobs front, as jobless claims rose 7,000 to 325,000 from 318,000. That’s encouraging because it was less than Wall Street’s consensus forecast of 334,000. The January employment report, to be issued on February 4, is expected to show an increase of some 185,000 non-farm payrolls. That would be the highest jump since last October.

All in all, most analysts agree that the economy is on firm ground, and that inflation is not a major concern. With than in mind, by the time you read this, the FED will most likely have raised a key interest rate by another quarter percentage point to 2.50%. That would mark the sixth increase since the FED set out on a rate-raising campaign last June.

While the economy appears to be on firm ground, there are still factors that could be a drag on economic growth and the stock market as we get closer to spring time. Of major concern is the burgeoning trade deficit, which knocked 1.73% point off the GDP in the fourth quarter of 2004. We’ll see how the administration contends with that critical issue in the coming month and whether or not it will have a significant effect on the economy and the stock market.

MARKET FORECAST

Punxsutawney Phil has most likely seen or not seen his shadow by now. And we are either in or not in for six more weeks of winter weather. Too bad the celebrated groundhog can’t predict whether or not the January sell off will continue, or if the market will rally.

It’s probably too much to expect of a rodent to be able to offer any insight into the January effect, anyway. For those investors who believe in the January effect, however, the markets performance to date in 2005 is a sober sign of things to come. The “theory’ behind the so-called January effect is that stock market returns during the month of January predict how stocks will perform for the rest of the year. For example, if stocks go up in January, there will be a bullish market for the rest of the year. However, if stocks fall, as they have this January, better circle the wagons.

Fortunately, not many analysts take the January effect too seriously. To back up their skepticism, these experts point out that during the past 50 years there have been 20 years when stocks underperformed in January. However, in eight of those years, the market proceeded to post gains by the end of the year.

Most investors who have been around for awhile know that the market could shrug off its January slump ands stage a rally in February and the months to come. We think that the sell off and profit taking in January, which followed a market boom late last year, will lead to some good buying opportunities in the months to come.

GROWTH STOCK PICKS

·   Visual Networks, Inc. (NASDAQ: VNWK)

Last Price: $4.51
52 Week Range: $2.20 -$4.75
Volume: 490,682
50 day moving average: $3.65
200 day moving average: $3.09
12-Month target: $10
Web Site: http://visualnetworks.com

U.S. Corporation
Web Enterprises, Inc.
P.O. Box 51488
Ontario, CA 19751
Phone: 909-464-0500

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