Swinging for the fences Swinging for the fences GM Preferred, Applied Materials and AIG are special situations that may offer above-market returns. March 28, 2005: 7:47 PM EST By Michael Sivy, CNN/Money contributing columnist NEW YORK (CNN/Money) - Regular readers of this column know that I believe most individual investors should put the bulk of their money in conservative growth stocks. The logic is simple: Big companies that dominate their markets are least likely to get into trouble so bad that they can't recover. They're also most likely to be able to maintain their long-term growth rates. So if you chose companies with superior earnings growth and buy their shares at low-to-moderate prices, you'll maximize your chances of matching or beating the broad market. But a well balanced portfolio shouldn't rely on big growth stocks alone: To minimize your risk, you should diversify as much as possible. And that means also owning some highly defensive choices and some more aggressive picks. With that in mind, here are my nominees for today's most interesting special situations. All three carry above-average risks but could offer equally big returns. Here are brief rundowns of the three situations. General Motors preferred shares In Mid-March, General Motors announced that first-quarter results would show a loss of around $1.50 a share. The company also slashed guidance for full-year 2005 earnings. The stock went into melt-down mode and is now at its lowest price in more than a decade. No one knows what is going to happen next. GM's latest models have received poor reviews and the company is saddled with wage levels, pensions and healthcare obligations that make it uncompetitive. On the other hand, GM has billions of dollars in cash and will launch new pickup and SUV models in a couple of years. Some analysts fear a cut in the common dividend; others say that free cash flow will rebound powerfully by 2007. As conservative analysts downgrade the common shares, contrarians are thinking about buying it. Whoever is right about the common stock, there's an interesting opportunity in the GM preferred shares and notes. For all practical purposes, these are fixed-income securities and their dividends or interest have to be paid before the common stock dividend is paid. These issues trade on the New York Stock Exchange like a regular stock. But like a bond, they have a face value and they are now trading at a big discount. Down from $25 to as little as $20, these issues are yielding nearly 9 percent. GM's problems may further hurt the common, but it's unlikely that payments on preferred issues will be affected. The issues would probably be even more attractive on bad news -- if GM is further downgraded, cuts its common dividend or announces another negative earnings surprise. Since there are a variety of different preferred issues, it's best to buy them through a broker who is familiar with preferred stocks. Applied Materials The leading maker of semiconductor-manufacturing equipment, Applied Materials is one of the most volatile cyclical growth stocks. At a current $16.45 a share, the stock is down more than 70 percent in the past five years. And so far, the semiconductor business doesn't seem poised for a quick upturn. And business has to be strong before manufacturers feel compelled to ramp up their capital spending on the kind of equipment Applied Materials makes. But based on next year's earnings estimates, Applied Materials (Research) is trading at only a 17 P/E. And when the upturn does finally come, earnings could soar and the stock's multiple could expand too. You may have to wait for the turn and brace yourself for a bumpy ride, but this is a stock that could triple over the next five years. AIG I first recommended insurance giant AIG at $71.50 last year before the company become the subject of an investigation by New York Attorney General Eliot Spitzer. Since then, I have recommended the stock again at lower prices. After the investigation was announced, AIG (Research) dropped below $55. When it appeared that the legal problems were resolved, the stock rebounded to $73. But in the past couple of weeks, a new investigation has begun, and the share price is back down to $57. It's unsettling that a second, more serious wave of legal problems arose after it appeared that the worst was over. I don't know how long AIG's troubles will last or how serious they will become. But it's important to remember that restating past earnings has little effect on the future share price. Unless investors begin to question the company's core growth rate or financial soundness, the stock price will rebound -- and it could rebound a lot -- once shareholders see the light at the end of the tunnel. Michael Sivy is an editor-at-large for MONEY magazine. Click here to receive Sivy on Stocks via e-mail every Monday.   Quelle "Swinging for the fences" : Cnn.com Main page for "Swinging for the fences"