Calling for a stock to double has its risks.  That is especially the case when the heady market has turned into a cautious one.   Worse still, we have already seen many key companies double, triple, or even quadruple from the lows of 2009.

Despite the risks, for Q2-2010, we have identified a new group of stocks that may double over the next one to two years.  Of course, some of these have significant caveats.

We have looked at Brocade Communications Systems, Inc. (NASDAQ: BRCD), Citigroup, Inc. (NYSE: C), Hartford Financial Services Group Inc. (NYSE: HIG), Rite Aid Corp. (NYSE: RAD), Tesoro Corporation (NYSE: TSO), and Wendy’s/Arby’s Group, Inc. (NYSE: WEN) in our screens of stocks which could see substantial returns under the right circumstances.  Our screening process takes value investing, turnaround, and even former special situations into account.

We have employed several key metrics that differ from stock to stock and sector to sector to see which stocks could still put in a double.  An implied target has been offered up on most of these versus current share prices.  While these are not mega-cap stocks, we tried to keep the focus on mid-cap or large cap stocks.

Companies with lower market capitalization rates had to be very liquid and very well known to be considered.  These stocks also needed a history of better times in the past. Or they had to have the fundamentals in place or fundamentals that were coming into place that could justify the projection.

Another requirement for our screening process was that this would not just be a double on top of other exponential moves just because of charts or momentum as a “flavor the day” strategy.  Micro-cap stocks or other “trends of the week” were also eliminated. And we generally prefer stocks which also have stock options that investors can use.

These stocks are in alphabetical order to avoid any order issues over which is most likely to perform best.

Brocade, or Arcade..
Brocade Communications Systems, Inc. (NASDAQ: BRCD) went off the track in late-February after the data-storage networking company showed that its fiscal first-quarter revenue fell short of Wall Street expectations and cut its fiscal-year guidance. It guided fiscal 2010 earnings to $0.54 to $0.58 and expects revenue to grow 8% to 12%, or about $2.11 to $2.19 billion.  At the time, firms including Jefferies, Stifel Nicolaus, RBC Capital, and UBS all lowered their ratings on the company.  At the end of April, RBC did raise the rating to Outperform and gave it a $9 price target.

The company’s ethernet business saw significant declines, and it has had issues competing against larger players for years. What is likely is that Brocade, after buying Foundry, has been a mental buyout candidate in the minds of many investors but has yet to show that a deal is on the horizon.  Some investors still have hope for a deal to come its way as Cisco is starting to compete against large tech giants in new areas outside of networking and as the storage centers and networkers consolidate.

The lows this year were under $5.50.  The old 52-week range when we first began screening these stocks was $3.95 to $9.84, but now the 52-week range is $5.26 to $9.84.  At the end of Q1, shares were close to $5.50 and a price of $11.00 would imply over 19-times 2010 earnings expectations and about 2-times revenues.

Brocade reports earnings on Thursday, and we have no call that the report is going to be one you have to get in ahead of.  The trend is to sell earnings right now. However, the good news is that the bar is set low for Brocade even if it will still need to beat lowered expectations – since it is still thought of as being in turnaround mode.

The kicker is that later this year the company may require some new blood to help run the company.  If Brocade cannot get its act together, it could end up floundering and be a single-digit stock for years.  The competitive landscape is only getting tougher and Brocade may only be able to compete on price with less of a full portfolio for customers.

This was almost a $2.00 stock at the March 2009 peak of the panic selling, and was a $8 stock in January and over $9 as recently as last November.  In recent years its stock has petered out at $10.00.  A buyout may get it it closer to $10.00 or maybe even $12.00 if a real turnaround comes the old fashioned way.  Risks abound.

Mr. Vikram, Mr. Bove, and Uncle Sam…
Citigroup, Inc. (NYSE: C) is the sole pick of large money center or super-regional banks that could possibly double.

There are other regionals that have a shot, and much depends upon financial reform and much depends upon getting Uncle Sam running the government rather than running the banks.  Regulation could stymie ALL banks and brokers, although there will be some winners and some losers as many could become no more than regulated utilities in the future.

Technically, Citi’s stock has already doubled off of the $1.00 lows and then some.  But it offers the most upside via leverage and spin-offs as it gets down to a”‘core-Citi” operations.  The big issue here is that Uncle Sam’s share sale could keep the stock suppressed with a share supply overhang.

The good news is that Vikram Pandit has been executing selective sales and spin-offs. Dick Bove of Rochdale at one point in 2010 raised his rating to “Buy” from “Hold” and gave a long-term target of $8.50 on the stock.  With a close of $3.73 on this Tuesday, the 52-week range is $2.55 to $5.43.  A price of $7.50 is under the old Bove target and getting to much higher share prices may only be possible after non-core spin-offs and asset sales actually generate a much lower market cap down the road for what is left of a core-Citi.  Any double-dip recession derails this entirely, and right now the European situation is not helping matters.

The last time Citi was at $5.00 was as recently as April 21, so the price change game here is far from over and we would expect this to be a much longer-term development rather than something fast.

Insurance, or Financial Planning?
Hartford Financial Services Group Inc. (NYSE: HIG) is the only company in the insurance sector that might be able to get out of recent trading ranges and still continue its run higher – above what has already been exponential returns from its lows.  Shares are close to $25.00, the lows in Q1 were right at $22.00, and it has been in a range of $20 to $30 for about nine months.

It is now out from under the TARP and is  starting to see normalized earnings again.  It also beat earnings expectations in its last 4 reports significantly.  If things continue to outperforming here in a normal environment, a $44 price is a double from Q1’s lows and a $50 target is a double from today.  The Thomson Reuters EPS estimates are $2.99 for 2010 and $3.90 for 2011.  The highest individual earnings estimates are above $4.00 EPS for each year.  Depending upon your call, this would be valued at 10-times to 12-times forward earnings.

The good news is that this is not really a healthcare name.  A steep yield curve helps here, but any double here would not be possible if longer-term rates climb rapidly and cause real investment losses in the portfolio.  This may seem like a stretch, but the company has been one of the few that keeps substantially beating estimates.  And its dividend policy could be among the first wave of companies lifting the payouts to holders.  The $0.05 dividend compares to an old dividend of $0.53 per quarter.

Before the recession, this was a $100+ stock in 2007 and was above $70 as recently as September 2008.

Right Aid or Wrong Aid?
Rite Aid Corp. (NYSE: RAD) is a serial disappointment for investors, and the company has had a nearly impossible time of competing in the challenging market of drug stores.

The company has been a turnaround without a real turnaround for over a decade now.  Thomson Reuters estimates show losses out for the horizon.  It also still has yet to show any major same-store sales gains over peers.  And it seems that some of the old problems are still the problems of today and tomorrow.  Nevertheless, reoccurring death sentences have been granted clemency each time over the last decade.

The company should be embarrassed about its March same store sales being down 0.1%, especially considering that March was such an easy comparison month that many big stores saw double-digit gains.

April’s 1% decline offered no great hope for an immediate jump.  The current stock price continues a downward trend from the $1.74 level in late March and shares are now right under $1.25.  Frankly, one month of positive same store sales could help restore some investor favor here and the 52-week range for the stock is $0.98 to $2.35.

A double here would barely make a new 52-week high.  Its stock chart is ugly right now, and a double may require one more round of shrinkage and require one more big push by management.  It is very possible that more new blood is needed to make things happen even if some recent changes have been executed.

The other issue in Rite Aid’s favor is that this stock continues to have a cult-like following on stock rallies as everyone wants to catch the next dollar-stock monster move.  The solid pharmacies trade closer to 0.5-times revenues, and that would generate close to $15.00 per share if Rite Aid was a solid pharmacy. We have no aspirations of seeing that price and that level is only meant to be shown for posterity purposes.  Still, much upside remains if it can ever get the ship turned in any new direction.

Refinery woes

Tesoro Corporation (NYSE: TSO) has been even more of a junkyard dog in refining that Valero, and that is saying a lot in the world of downside.

This one was down close to 90% from peak to trough, with shares that were above $60 in 2007 and the lows under $7.00 in late 2008.  At $12.50 now, its 52-week range is $10.62 to $18.11.

For Tesoro to get back up into the $20’s, the refining business has to get better as a whole sector.  The company probably can’t do it alone, but this one is deemed to have the most leverage on share price if a better future for the sector lies ahead.  Carbon taxes, price pressure, weak demand, environmental pressure, and more act as severe hurdles.

Thomson Reuters has estimates of -$0.64 EPS in 2010 and then all the way up to $1.22 for 2011.  It always seems to have very big earnings disparities with big beats and huge misses.  The highest analyst target here is $18 rather than $24 to $25, which would imply a possible double – although our call is probably one that would push the longer part of a one-year to two-year horizon.

The refining business has been tough, but at some point the sector cannot be kicked anymore.  Ultimately, the refining sector as a whole will have no choice but to pass the higher costs down to the end users.  Refining capacity as a whole is running far higher on the DOE reports, showing well into the 80% run-rates versus in the 70-percentages just a few months ago. What will help the refineries is when oil gets into stable price bands based upon raw supply and demand markets rather than big swings up and big swings down.

This trades at about a discount to peers on revenues, it trades at a discount to book value, and it is under a new CEO who came from ConocoPhillips.

Misunderstanding Fast Food?
Wendy’s/Arby’s Group, Inc. (NYSE: WEN) has been a very difficult stock to evaluate, and analysts have yet to endorse the new combined company.

In fact, its stock is stuck.  Competing in the fast food segment of casual dining is not the world’s easiest job and pricing power is not in the favor of companies.  16% of the company is owned by Trian and more by Nelson Peltz personally; and by the looks of it there seems to be solid control of the company in place.

The company may be the most misunderstood stock in its sector, or it may be suffering from a serious identity crisis.

The risk does not appear to be that it will suffer a long slow death.  Instead, the risk is that the share price will be limited to steady range-bound trading for years and years.  Shares are at $4.63 and the 52-week range is $3.55 to $5.55.

A fairly recent disclosure revealed that four franchisee companies, which own 25 Arby’s in Florida, North Carolina and Virginia, are seeking to reorganize under Chapter 11 protection.  This probably does not help the bullish case.  The company recently launched a national campaign, Arby’s a $1.00 “Value Menu,” in an effort to bring in more customers, but the verdict is still out. Nelson Peltz reportedly lost bidding interest (thankfully) in CKE Restaurants, so it is unlikely that cramming even more brands into the mix is a risk.

The big concern is that the company has never fully recovered and there seems to be doubt about its ability to ever get back to the Dave Thomas days of success.

The valuation in an earlier analysis was about 0.65-times revenues, a severe discount to McDonald’s, Yum!, and even the formerly tied Tim Horton’s. It is hard to know if the metrics will get back in Wendy’s/Arby’s favor or not, but if any turn starts to be seen, this one could catapult much higher than its peers due to a depressed valuation.

JON C. OGG

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