High-risk, unpopular stocks can be friends

For about seven decades, academic studies have shown thatunpopular stocks outperform stocks with higher price-to-earningsratios.

So, beginning in 1999, I have tracked the one-year performance ofthe 10 stocks that begin the year with the lowest P-E ratios.

The compound annual return on the outlier stocks for the years1999 through 2010 was 16 percent, compared with 1.5 percent for theStandard & Poor's 500 stock index.

In 2010, the low P-E outliers notched a 25 percent return,compared with a 15 percent return for the S&P 500. The bestperformer was BreitBurn Energy Partners LP, up 104 percent. Theworst was Mirant Corp. -- which, after a merger, is known as GenOnEnergy Inc. -- down 33 percent. Eight of the 10 stocks rose.

Buying extremely out-of-favor stocks comes with a large dose ofrisk. The low P-E outliers declined 61 percent in 2008. The out-of-favor stocks roared back in 2009, notching a 97 percent return.

Let's look at the 10 stocks.

The lowest of the low, selling for three times earnings, isEarthlink Inc., an Internet service provider that focuses largely ondial-up connections. Earthlink, based in Atlanta, has been losingcustomers to carriers that concentrate on broadband.

Kulicke & Soffa Industries Inc., of Fort Washington, Pa., designsand makes semiconductor assembly equipment. Analysts expect earningsto fall about 60 percent in the fiscal year. That's why the stocksells for four times earnings.

Oshkosh Corp., based in Oshkosh, Wis., makes military transportvehicles, cement mixers, fire engines and ambulances. The companyhas pulled debt down to less than stockholders' equity, so I willtake another look. The P-E is four.

Back in 1995, Novell Corp. of Waltham, Mass., had $2 billion inrevenue and was considered a rival to Cisco Systems Inc. Today, withrevenue below $1 billion, Novell is less than 3 percent of Cisco'ssize. In November it agreed to be purchased by Attachmate Corp. for$2.2 billion.

Micron Technology Inc., a semiconductor manufacturer withheadquarters in Boise, Idaho, has seen an upturn in revenue lately.It has been profitable five quarters in a row and sells for sixtimes earnings.

Impax Laboratories Inc. of Haywood, Calif., makes generic andproprietary drugs. Analysts expect it to earn a record $2.95 a sharefor 2010, then suffer a sharp earnings drop this year. The stockfetches six times earnings.

Also sporting a multiple of six is Western Digital Corp. of LakeForest, Calif. I mentioned it last week as one of my 10 favoritestocks for 2011.

Skechers USA Inc., the No. 2 U.S. sneaker maker seems due for acomeback. The Manhattan Beach, Calif., company declined 32 percent.The stock carries a P-E of six.

Apollo Investment Corp., based in New York City, is a business-development company. It has an erratic profit history but turned onelast fiscal year and is expected to stay profitable this year andnext. The P-E is six.

The final spot on the outliers list goes to Ariad PharmaceuticalsInc., a Cambridge, Mass., company working on drugs to treataggressive cancers. In May, Merck & Co. signed a licensing agreementto sell one of its drugs. Ariad sells for six times earnings.