Ready to buy? Then read on
The stock market funk of 2006 has caused plenty of damage in a matter of weeks. But the smaller stocks that were the market's high fliers just months ago have taken the worst beating of all.
Investors have been selling their riskier stocks, the ones that already made them lots of money, and it's hard to predict when that will stop. It could be a noisy end to the long-running bull market for smaller stocks, or something else. Stocks that have fallen hard in a market selling everything are temptations to contrarian investors who can afford to buy and hold a while. The trick: separating new bargains from stocks that are simply less expensive.
Consider three companies with up-and-down stock stories: Akamai Technologies Inc. of Cambridge; Hologic Inc. of Bedford; and American Science & Engineering Inc. of Billerica. I've written about all three and the stories behind them.
But the hammer has come down on each stock. Akamai shares, which had climbed more than thirtyfold from their 2002 lows, are down 18 percent from their May peak and had slumped as much as 24 percent as recently as last week. Hologic stock, which rocketed from a 2001 low of $2.31 to peak over $55 this year, is down 36 percent since March 31. American Science shares, which had climbed from $5.75 to over $93 in less than five years, have plunged 43 percent from highs set in March.
All three may bounce back and look like big winners in the months ahead . But if I had to choose one, I'd select American Science & Engineering. Akamai, which sells products to help avoid Internet traffic jams, and Hologic, a leader in digital mammography equipment, have plenty of potential. But both are expensive, trading at more than 40 times profits forecast for this year, and that makes them riskier. American Science & Engineering, which makes bomb detection hardware and other security equipment, has the kind of profile that appeals to bargain hunters. It has lots of potential and limited risks.
American Science & Engineering's stock is relatively cheap, it s balance sheet is especially strong, and the growth potential for a company making products that can help detect bombs before they explode speaks for itself.
The company's stock, which closed at $53.84 yesterday, is priced at less than 17 times earnings forecast for the fiscal year that started April 1. Subtract $10 per share in cash and short-term securities on American Science & Engineering's balance sheet and the actual business trades at less than 14 times earnings.
Movements in American Science & Engineering stock can be pronounced, because there are only 9 million shares available for trading. The company's business, relying mostly on government contracts, tends to be lumpy from one quarter to the next, and executives don't offer financial guidance.
The people who question American Science & Engineering's business say government procurement of its equipment appears to be slowing. They said the company was too dependent on one product, a bomb detector that can be placed inside a van, and on a single client, the US government.
Orders may turn out to be slack in the quarter ahead, but it's hard to imagine demand for the company's products diminishing over time. ``We don't think the problem is going to go away, unfortunately," says analyst Stephen Levenson of Ryan Beck & Co. Meanwhile, American Science & Engineering is making progress on new products to examine cargo containers and to provide airport security. It has broadened its client roster abroad, especially in the Middle East and China.
Other stocks may climb higher than American Science & Engineering. But strong potential and limits to risk are an attractive combination for bargain hunters.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com. 
