Michael Brush

Company Focus10/15/2008 12:01 AM ET

Stock bargains the pros like now

After the market chaos of recent weeks, bargain hunters are on the prowl. See what companies value investors are snapping up while prices are down.

By Michael Brush

Down big. Up big. Now what?

Fears about a massive wreck in the global financial system pushed stocks down last week, helping create the worst week in U.S. stock market history.

Investors threw out the good with the bad, and some formerly "safe" stocks were hit hard as market players sold holdings that still had some worth. Smart buyers started snapping those companies up Friday, and the rest of the world seemed to flock to them Monday.

"We have been aggressive buyers. I think stocks are cheap," Pershing Square's Bill Ackman said at the Value Investing Congress, a confab of value investors that met in New York early last week.

Aaron Edelheit of Sabre Value Management said Friday, before Monday's historic rally: "People will look back and say, 'Oh, my gosh, why wasn't I buying?' You don't want to be like Jim Cramer scaring people out of the market."

Below, I'll tell you what the value shoppers have been buying in recent days, and why.

Sowing the seeds of profit

Would you believe it if someone said the economic crunch would get so bad that everyone in the world would cut back dramatically on eating? I doubt it. But that's what the market is saying.

The two leading producers of chemicals used to produce fertilizers, Potash of Saskatchewan (POT, news, msgs) and Mosaic (MOS, news, msgs), are off 58% and 75% from their peaks last summer. There's no way these two stocks should be this cheap, believes John Burbank of Passport Capital.

Burbank likes to look for companies that benefit from "bottlenecks" in supply chains supporting big trends. Potash and Mosaic fit the bill because the former controls 22% of the global market for potash and the latter has 15% of the market for phosphate fertilizers. When the world wants more food, farmers inevitably turn to these two companies to help grow it.

True, grain prices have come down recently, suggesting farmers may have less money to buy fertilizer. That has investors scared. But the big-picture trends are still in place to benefit both companies. Growth in China and India, for example, will continue to support rising incomes in those countries. And one of the first things poor people buy when they get more money is food. Burbank says Chinese consumers spend 40% of their newfound income on food, and in India it's 70%.

A near-term positive is that grain inventories are low, about 16% of usage compared with a historical average of around 25%, Citigroup analyst Brian Yu says. Low inventories mean suppliers have to restock, which creates demand for more grain and the fertilizer needed to produce it. Yu has a $112-a-share price target on Mosaic, which recently traded for $44, and a $264 price target on Potash, which recently traded at $105.

Portfolio tuneups

Historically, when times are bad and people lose their jobs, many go back to school. So demand can actually go up for spots at for-profit schools during economic slowdowns, making them countercyclical plays.

And if drivers do try to squeeze a few more years out of their cars now, as I suspect they might to save money, that's another trend that will benefit Universal Technical Institute (UTI, news, msgs), a for-profit school that offers 10- to 20-month training courses for auto mechanics.

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Our lame-duck economy
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Universal Technical Institute is the go-to choice in the field. It has strong relationships with most of the car manufacturers and industry-leading stats such as a 70% graduation rate and 91% job placement rate, and low 7.2% student loan default rate.

In the medium term, there are positive trends as well. Kian Ghazi of Hawkshaw Capital Management thinks that about 50% of the 1.3 million auto mechanics in the U.S. may retire over the next seven to 10 years. The new ones coming in need advanced training because cars are so much more sophisticated these days.

Some investors worry about a shortage of student loans because of the credit crunch, but Ghazi believes federal funding will help offset this problem. He thinks Universal Technical Institute will earn $3 a share at some point over the next few years, taking the stock up to $45 from recent levels of around $16.

Continued: EchoStar worth a look

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