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Inside Wall Street

Steel and Houses: Picks for Bloody Days

"The time to buy is when blood is running in the streets," financier Baron Rothschild is said to have remarked during the Paris panic of 1871. When everyone else was selling, he was buying. Is it time to heed this mantra, which contrarians swear by? Following the sell-off of Bear Stearns, the collapse of Lehman Brothers (LEH), and the government seizure of AIG (AIG), Europe's rush on Oct. 6 to bail out several of its big banks caused world markets to plunge. That day the Dow Jones industrial average plunged 369.88 points, or 3.58%, to 9955.50, the first close below 10,000 in four years. By Oct. 8, the Dow stood at 9258.

To George Putnam, editor of The Turnaround Letter, the situation looks bloody enough to make this a time to start buying. He notes that in most market crashes since 1974, the Standard & Poor's (MHP) 500-stock index posted double-digit gains 12 months later. So good news may lie ahead.

Jeffrey Kleintop, chief strategist at investment firm LPL Financial, thinks so. He says: "When we look at past recessions that took place in the aftermath of crises, the stock market typically posted a gain during the recession," as it did in 1981-82 and 1990-91. The turning point in past recessions was intervention by policymakers, he adds.

In this environment, most analysts focus on companies with strong cash flow, profitability, sales, and dividend yields. Leo Larkin of S&P has a buy on Nucor (NUE), the No. 1 U.S. steel minimill, with one of the most diverse product lines of any steelmaker.

"Nucor is a vehicle for capitalizing on the consolidation of the global steel industry," says Larkin. He also sees accelerating free cash flow due to a combination of rising net income and generally moderate capital spending for the next several years. That should enable Nucor, he says, to raise its dividend, make acquisitions, and invest in new steelmaking technology. Larkin sees Nucor, now at 32.31 a share, rising to 66 in 12 months, based on his earnings estimate of $7.04 a share in 2008, up from $4.94 in 2007.

Bernie Schaeffer of Schaeffer's Investment Research recommends buying homebuilders. His top choice: Meritage Homes (MTH), whose stock has held up relatively well in the crisis. Down to 7 on Jan. 22, it rocketed to a 52-week high of 29.49 on Sept. 19. But it fell to 19 on Oct. 6, the day of the big Dow tumble, and is now at 16.35. Schaeffer, who owns shares, remains bullish, however. Meritage, a builder of single-family houses in such states as California, Florida, and Texas, is improving its cash position better than its peers, he says. It outperformed the homebuilders ETF group by 50% in the past year. Schaeffer's 12-month target: 40.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Athenahealth, the Doctor's Friend

In times of economic woe, doctors get more cost- conscious. So demand is rising for the services of Athenahealth (ATHN), the largest publicly traded provider of Web-based systems that automate and manage billing-related functions for physicians. It has over 13,500 medical providers in its national network.

Athena's services help health providers get "faster reimbursement from payers, reduce errors, hike collections, cut costs, and efficiently manage clinical and billing information," says Richard Close of investment firm Jefferies (JEF) (it has done banking for Athenahealth), who rates the stock a buy.

Sean Wieland of Piper Jaffray says Athenahealth (a client) is largely insulated from the economy's swings by its fee-based revenues. He rates the stock, now at 26, a buy with a year's target of 37. He sees profits of 55 cents a share in 2008 and 65 cents in 2009, vs. 26 cents in 2007.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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