Wake Up! To Sleeper Stocks

Chasing headlines — buying and selling shares based on company, industry, or market news — is a strategy that many investors successfully employed when stocks were flying high. But in today’s uncertain climate, going under the radar can also reap rewards. Often referred to as sleeper stocks, these downtrodden or overlooked shares can lead to solid returns.

Any stock that is not in the limelight or has fallen out of favor with the investment community and yet has solid fundamentals is a good sleeper candidate. “After the bubble burst for large-cap companies in 2000, smaller companies started to shine,” says John W. Rogers Jr., founder, chairman, and CEO of Ariel Capital Management L.L.C. in Chicago (No. 2 on the BE ASSET MANAGERS list with $19.36 billion in assets under management). “They had been neglected for so long and were so cheap that there was nowhere to go but up.”

One investor who has awakened to sleeper stocks is Andrea Hardy, an IT team leader with a healthcare company in Indianapolis. In 1999, she bought shares of her former employer, ITT Educational Services (NYSE: ESI), a provider of technology-oriented, postsecondary degree programs, since she felt there was a market for the company’s services. Since then, the stock price has gone from around $10 a share to $67. “I’m holding on,” says Hardy. “If the economy slows down next year, which is a possibility, people will go back and retool [their career strategy] by getting more education, so the company should do well.”

Why look at sleepers? For starters, some of these unsung stocks have had impressive returns. Take medical robotics manufacturer Intuitive Surgical (Nasdaq: ISRG). If you purchased this stock in January 2005, you would have nearly tripled your investment before the end of that year. The shares soared as hospitals continued to adopt technology needed to perform minimally invasive surgeries. Then there’s aQuantive (Nasdaq: AQNT), a digital marketing company that gained more than 180% as the stock rode the wave of online advertising.

Some of this year’s sleeper hits include Ambassadors International (NASDAQ: AMIE), which is up some 122% so far in 2006. Shares of the travel event management company did not take off until the announcement of two acquisitions within its industry. Systemax (NYSE: SYX) is up 175% so far. A direct marketer of brand-name and private-label computer and industrial products, its share price has been steadily rising throughout the year as Systemax fixed accounting problems that had plagued the company.

Though many sleeper candidates tend to be of the small- and mid-cap variety, large-cap stocks that have fallen out of favor can also fit the bill. Rogers favors CBS Corp. (NYSE: CBS), a recent spin-off of Viacom, and Black & Decker (NYSE: BDK), which has been devalued by 15% between May and September. “CBS is one of a number of media companies trading at very low prices, considering their fundamental value,” says Rogers. “Black & Decker seems very cheap because the market has overreacted to the possible impact of a weaker