Two High-Quality Stocks That Are Now Trading Near their 52-Week Lows

	Paul Tracy Street Authority.com
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There are few things more satisfying for an investor than buying a stock near a 52-week low only to watch it turn around and start moving higher. In addition, if you're able to identify a quality stock has been unjustly beaten down by investors, then you're far more likely to earn above-average profits over the long haul. In fact, some value-oriented investors, including such big names as Warren Buffett and John Neff, are famous for making big money in unloved, beaten-up stocks.

But there's an old saying on Wall Street: "Never catch a falling knife." In other words, investors should never purchase a stock exclusively because it is trading at its lows. After all, cheap stocks often trade cheap for a reason -- namely deteriorating fundamentals. This saying has stood the test of time, and for good reason -- statistics show that stocks hitting new 52-week lows tend to underperform the market over the subsequent six and twelve month periods.

So, which philosophy is correct -- should we attempt to buy at the lows, or should we avoid declining stocks altogether? As is so often the case in the stock market, both are. While you can certainly make a nice profit by purchasing stocks that are trading near 52-week lows, it's important to stick to a strict fundamental discipline. In other words, don't throw your normal fundamental buying criteria out the window when looking for turnaround plays -- stocks that are weak financially or carry deteriorating growth prospects are best avoided.

In this issue we'll profile two stocks that are trading near their annual lows but that still sport strong long-term growth prospects. Both of our picks are financially sound, have low debt levels and are highly profitable. And, thanks to their weak share prices of late, both names represent excellent fundamental values for investors.

INTERACTIVE CORP. (IACI, $23.84)

Business Overview

IACI offers products and services directly to consumers via a number of different media outlets. Barry Diller, the media mogul and former head of ABC, has complete control of the company thanks to his ownership of 60% of the company's voting shares.

IACI can be divided into four main operating units. Most important is the travel division (InterActive Travel -- IACT). IACT includes three of the most popular online travel booking websites: Expedia.com, Hotels.com and Hotwire.com. These three websites allow consumers to book vacation packages, flights, hotels and rental cars through a variety of providers. In return, IACT earns a fee for making the bookings. In total, IACT accounts for over 35% of the company's total revenues.

The second main leg of IACI's operations is the Home Shopping Network (HSN), which accounts for approximately 30% of the company's revenues. HSN is a cable television channel that highlights various items for sale; consumers can call in and buy the featured items using a credit card.

Next, there's Ticketmaster. Ticketmaster is the leading event-booking service in the United States. The company sells tickets to concerts, sporting events, theaters and art exhibits via a telephone and online service to consumers. This division accounts for around 12% of overall revenues.

Finally, the firm boasts a number of smaller online services that, although not as well established, are showing solid growth. The list includes LendingTree.com, an online service that matches home buyers with mortgage lenders, as well as a number of online dating services, most notably Match.com. Overall, these services account for roughly 10% of total revenues.

Competitive Advantages

The company's online travel websites face a host of competition from such well-established rivals as Travelocity.com, Orbitz.com and Priceline.com. In addition, several major hotel chains -- most notably Holiday Inn (part of the Intercontinental hotel network) and Hilton -- offer online best-price guarantees on their own web sites for their hotel rooms.

However, IACT has a solid first-mover advantage over all of these competitors. In total, around 25 to 30 million unique visitors log on to IACT's travel-related websites each month. That makes IACT the overwhelmingly dominant market leader in the online travel business. Consider that Orbitz earned total revenues of around $240 million in total last year while Priceline sold $870 million worth of travel-related services. When you compare those figures to a whopping $570 million in sales for IACT in the last quarter alone (around $2.5 billion annualized), both Priceline and Orbitz are still minor players in this market.

And in the online travel business, bigger is definitely better. The reason is that hotels, rental car companies and airlines want to get their product or service in front of as many consumers as possible. In order to accomplish that goal, they absolutely must list their items on IACT's websites because these sites boast such a large user base. As a result, IACT is able to negotiate the best rates and demand large discounts for rooms that it purchases on a wholesale basis. The firm then resells these rooms and flights to consumers, enabling IACT to earn fat profit margins.

Growth Drivers

The major growth driver for InterActive Corp. is the online travel market. Because IACT is by far the company's fastest-growing major division, it will be the major driver of future growth.

With this in mind, many analysts expect the online travel market to grow by +20% or more annually for the foreseeable future. This growth will come as online travel continues to grab a larger and larger piece of the total U.S travel market. According to Jupiter Research, online travel booking revenue was around $46 billion in 2003 -- just 20% of the total travel market that year.
And check out the statistics for business travel – online bookings totaled around $9 billion -- just 13% of the total.

Our charts speak for themselves. By 2009, according to the same research firm, online booking should total a third of all travel bookings -- a business worth over $90 billion. Meanwhile, business travel bookings are set to see even stronger growth, increasing to as much as 35% of the total corporate bookings -- nearly triple the current share. As the largest and most dominant player in online travel, IACT will benefit overwhelmingly from this growth.

Valuation

The most striking valuation metric for IACI is price-to-free-cash flow (P/FCF). FCF is a measure of the actual cash the company earns after netting out necessary capital expenditures. IACI earns over $1.1 billion annually in free cash flow, yet the company's market capitalization is just $16.5 billion.

That means that in fewer than 15 years, assuming constant free cash flow generation, the company will earn enough cash to equal its current valuation. That leaves room for the firm to either buy back stock or start paying a sizable dividend to shareholders.

Assuming that the company's long-term growth is close to +17%, earnings should top $2.50 per share by the end of this decade. Applying a price-to-earnings ratio of 17 (equal to that long-term growth rate), we could see the company trading around $42 per share -- nearly double the current price. In addition, given that IACI generally trades at a slight premium to its growth rate due to its dominant market share, the stock could reach much higher prices than that.

APOLLO GROUP (APOL, $75.00)

Business Overview

The Apollo Group is a for-profit education company. The firm has two major divisions -- the University of Phoenix (UoP) and the University of Phoenix Online. UoP offers mainly Bachelor's and Master's degree courses through a network of 82 campuses and a little over 100 education centers (smaller satellite campuses) in 39 States and abroad in Canada. Meanwhile, the firm's online division offers courses and training via the Internet.

Traditionally, the company has targeted working adults for its courses. In fact, the average age of Apollo's student body is about 35. More recently, however, the company has begun to target 18 to 24-year olds with its Western International University program.

Competitive Advantages

APOL's main competitive advantage is the type and quality of courses it offers. Most of the company's competitors in the for-profit education market do mainly so-called Associate degree programs. Such degrees generally involve cheaper tuitions and lower profit margins for the educator. By contrast, over 95% of the degree programs that APOL offers are Bachelor's or Master's degrees -- this explains why APOL sports an operating margin in excess of 30% compared to just 18% for competitors Career Education Corporation and ITT Educational.

And because APOL offers more advanced degrees, it tends to attract employed adults that are looking to further their existing careers. As a result, over 50% of the firm's student body receives tuition support from their employers. This has another important effect on the quality of APOL's earnings stream: because most students already receive a significant amount of financial support from employers, APOL has not been forced to offer credit to its students. As a result, APOL doesn't have exposure to the bad debts that some of its competitors have faced in recent years.

Finally, my staff and I like the fact that all of the company's degree programs have what's known as regional accreditation. This is a very difficult certification to receive, and it opens students up for federally supported financial aid programs.

In short, APOL has carved out a defensible competitive niche in Bachelors and Master's degrees. It would be difficult for current competitors, most of which offer mainly Associate degrees, to gain accreditation and start offering these more advanced degrees.

Growth Drivers

My staff and I see two main growth drivers for APOL. First, growth in its University of Phoenix Online unit will likely remain strong for the foreseeable future. Growth in the online division will be a particularly strong catalyst for profit growth because this division carries much higher profit margins than traditional campus-based education. The reason for the higher margins is that online students don't need classrooms or a fixed campus -- items that involve enormous fixed overhead expenses.

Growth in online student enrollment has been spectacular in recent years, particularly among busy working adults. These students have shown a strong preference to take classes via the Internet rather than taking time to attend a university on a typical campus setting. According to the Sloan Survey of Online Education, the number of U.S. students enrolled in at least one online class has ballooned from 1.6 million in the fall of 2002 to over 2.6 million this year.

Even better, another survey conducted by the University Continuing Education Association (UCEA) suggests particularly strong demand for online classes from foreign students over the past few years. The UCEA projects particularly strong growth in Asia over the next several years; over 70% of the university admissions officers it surveyed expected expansion in online enrollments from the region.

The reason for that growth: much tighter visa restrictions on foreign students in the wake of the 2001 terror attacks has made it more difficult for students to travel to the U.S. for study. Companies like APOL with strong online offerings should benefit from these tighter restrictions as foreign students choose to stay at home and get their schooling online.

Valuation

APOL trades at roughly 25 times projected 2006 earnings and sports a projected long-term growth rate of close to +25%. That gives the company a very reasonable P/E-to-growth (PEG) measure of just 1.0.

The company should earn over $7 per share by the end of the decade. Assuming that the company maintains a multiple of about 25X earnings, the stock could eventually be worth $175 per share, more than double its current valuation.

It's unusual to see a high-quality growth name like APOL trade in line with its long-term growth rate -- it's much more common to see a premium of 15% to 20% for such names. On that basis, there's room for even more appreciation from the stock.

My staff and I are also impressed by the company's nearly debt-free balance sheet and annual free cash flow of roughly $500 million. That gives Apollo plenty of scope to invest further in its online offerings, buy back stock or pay a dividend to shareholders.

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We sincerely hope you've enjoyed today's look at two high-quality stocks that are now trading at or near their 52-week lows. Please stay tuned for our next full issue, which we'll publish on Monday, December 6th. In it, my staff and I will scour the investment universe in search of undiscovered small-cap gems. In the process, we'll introduce you to several relatively unknown companies that could soar once they hit investors' radar screens. In the meantime, have a safe and happy Thanksgiving holiday, and good investing in the week ahead!

Paul Tracy will be available to take your questions until Thursday, December 2. Please use the form below to submit your questions.