Markets & Stocks
Attack of the zombie stocks
Some of the best performers in the recent bull market are stocks no one wanted just 3 months ago.
July 15, 2003: 7:27 AM EDT
By Chris Isidore, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Just four months ago American Airlines parent AMR Corp. looked to be on its way to bankruptcy and its stock got booted out of the Standard & Poor's 500.

The shares sank to little more than a buck from the mid-$20s a year earlier.

Now? At $11 it's racked up more than a 400 percent gain since the end of the first quarter, more than double the increases of the best performers of the S&P.

Back from the dead
The best performing stocks lately are those that were most beaten up.
Stock (ticker)5-Year High -- LowQ2 Return
AMR (AMR)$44 -- $1424%
Avaya (AV)$26 -- $1217%
Broadcom (BRCM)$275 -- $9102%
PMC - Sierra (PMCS)$256 -- $297%
Applied Micro Circuits (AMCC)$110 -- $185%
Calpine (CPN)$59 -- $1100%
CMS Energy (CMS)$51 -- $384%
Mirant (MIR)$48 -- $181%

Forget General Electric, IBM and other titans of industry. The real money to be made in the recent rally has been in the so-called zombie stocks, left for dead during the bear market only to post huge returns once fears of complete meltdowns lifted, and investors began to feel a little more brave.

Consider the No. 1 S&P stock in the second quarter, Avaya, the former Lucent unit that makes corporate phone systems. After two years of declining revenue and a string of losses, it reported in April that it nearly broke even in the first quarter. Shares are up 180 percent since then.

Three other tech companies -- Broadcom, PMC-Sierra and Applied Micro Circuits -- also make the list of top 10 S&P performers in the second quarter.

Each went into the quarter with a string of losses and gloomy outlook. But despite continued losses at PMC-Sierra and Applied Micro Circuits, all three stocks posted gains between 85 and 100 percent in the period -- and they've kept moving in July.

Don't try this at home

Of course finding such battered stocks ready to turn into winners is a risky maneuver, one best done with money otherwise slated for Powerball tickets or other gambles.

"The percentages are a little misleading. It's easier to do if your stock is a real dog," said David Wu at Wedbush Morgan Securities. "They usually got beat up for good reasons."

A beaten-up stock can be a genuine sign of trouble, and no matter how cheap a stock seems, remember that it can always go to zero.

Which of these beaten-down, or "zombie," stocks is most appealing to you?
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For example, anyone who tried to play the zombie-stock game with United Airlines parent UAL Corp. at $3 a share last November lost big. Unlike AMR, it was not able to solve its problems. By early December the stock had lost two-thirds of its already depressed value and it has since been delisted following the airline's bankruptcy filing.

Power producer and energy trader Mirant Corp. was another zombie stock. Its shares gained 81 percent in the second quarter, ranking it tenth among S&P components. But the outlook for investors who took that ride up and didn't get off is now bleak -- the companyfiled for bankruptcy court protection Monday night. Shares had already given up much of that second quarter gain with a 30 percent decline in the past two weeks.

For the other zombies, perhaps the biggest risk now would be mistaking their performance as an all-clear signal and trying to get a piece of the action. Simply, most analysts say that the easy money has been made.

"The dogs do well when the economy recovers -- they're always the best performing stocks," said Merrill Lynch chief U.S. strategist Rich Bernstein. "What's surprising is the valuations investors are willing to pay for those dogs."

Most major airlines have seen some improved results due to falling fuel prices since the war in Iraq and cost cuts from reduced flight schedules. But demand for air travel, and fares, are still depressed compared with the pre-Sept. 11 period, and those major carriers still have a cost structure not supported by the lower-fare environment.

"I don't see [the money-losing airlines] returning to profitability until the third quarter of next year at the earliest," said Blaylock & Partners analyst Ray Neidl, who owns small positions in Northwest Airlines and Delta and has "hold" recommendations on all the major airlines.

"I don't think they should be trading at bankruptcy levels," said Neidl, "but I don't think they're undervalued either."

Technology troubles

As with the airlines, the tech business climate seems to have stabilized. But stock valuations are lofty and fundamentals still are shaky.

"These companies have had multiple quarters of losses and they're not in the black yet," said Wu, referring to PMC Sierra and Applied Micro Circuits.

Wu owns some PMC and Applied Micro shares himself, even though he has a "sell" recommendation on Applied Micro and only a "hold" on PMC.

Some of the recently revived stocks may have already hit a peak or at least a plateau, as investors who had been excited by the signs of turnaround take a new look at the problems that face them.

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Besides Mirant, energy traders such as Calpine and CMS Energy, which saw their sector hammered by the bankruptcy and investigations of Enron Corp., also made it to the top 10 performers on the index in the second quarter. Calpine shares doubled during the quarter, while CMS gained 83.7 percent.

But while Calpine are up another 13.5 percent since the end of June, it's lost ground in recent days in the wake of Mirant's woes. And CMS shares have lost 10 percent in July going into Tuesday's trading.  Top of page

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