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Tickers in this Article: f, novl, msft, sunw, goog, rhat
There are a number of big name companies out there that have fallen on some tough times. But far too often I see investors looking to pick up a big name on the cheap regardless of the fundamental situation. That's a mistake. And it's why, in this third installment of a five-part series (click to read part 1, or part 2 of the series), I am reviewing some of the biggest fallen angels on Wall Street, and their future prospects, to help you avoid making such a mistake.

With that in mind, let's dig in.....

Ford (F): This is a stock you need to keep on your radar screen, because although I don't think the current price presents a good entry point right now, there are some potential catalysts on the horizon that could make this stock take off in a big way.

First the negatives: With interest rates on the rise, people aren't going to spend as much money on cars and trucks as they would in a low interest rate environment. And the gas situation is compounding the problem, because a number of Ford's key product lines, including Mustang, Lincoln, Expedition, and its line of pickup trucks, eat up gas in a big way.

What will drive this stock higher? My hope is that by the end of the year, the macro economic picture (specifically gas, and interest rates) will clear. I also hope that management will give some updated guidance on earnings going forward. As things stand now, Wall Street figures the company will earn 46 cents a share for the fiscal year ending December 2006, and 58 cents per share in 2007.

But my hunch is that Ford's management will guide 2007 earnings estimates upward at the end of the third quarter (06'). Why? Because the company's turnaround plan, called "The Way Forward", which was announced in January, and encompasses the closure of 14 plants by 2012, and the lay-offs of some 30,000 hourly workers, could start to hit the bottom line in a positive way.

This would be a definite catalyst, if announced and detailed to the press.

Ford has a cash horde of about $19 billion on its balance sheet. That's more then $10 a share! Of course, it also sports about $151 billion in debt. With that in mind, the company has been able to stay afloat, make its interest payments, and meet its pension obligations. The big catalyst here is if the economy does turn north, and inflation concerns go away, that $19 billion treasure chest could be used to make an acquisition, provide a special dividend to shareholders, or to buy back stock in the open market. Any of these announcements could prove to be a big boon for investors.

Again my hope is that by November or December Ford will have its ducks in a row. And, that the macro outlook will clear; management will offer updated earnings guidance regarding 2007 and the company will introduce its new line of products for the coming year, creating a media buzz. In my heart, this will be a more opportune time to pull the trigger, assuming the above comes to fruition.

Novell (NOVL): In the late 1990s, Novell was one of the top networking software makers in the business, going head to head with Microsoft (MSFT). At it's helm was Eric Schmidt, the technology genius who helped develop a programming technology called Java at Sun Microsystems (SUNW).

But times have changed. Schmidt was lured away to become CEO of a little company you may have heard of called Google (GOOG) (Great move by the way!). And in his absence, Novell lost its passion for new product development and marketing. Not surprisingly, Microsoft ate their lunch, and the stock dropped like a stone.

But again, the cycle is starting to turn.

Just this past week, Novell parted ways with its CEO, Jack Messman (who took the place of Schmidt) and CFO, Joseph Tibbets. The pair were replaced by Ronald Hovespian, and Dana Russell who had served as president, and vice president of finance respectively.

Hovespian's goal going forward is to drive Novell's existing Linux business, and to develop new Linux-based products and gain market share. Linux, for those unaware, is an operating system that is used on desktops and in servers. To date, a company called Red Hat (RHAT) has pretty much dominated this business.

That could very well change. Although Red Hat has had essentially a monopoly on this business for the last few years, Novell has plunged a lot of money into Linux-based products, as well as marketing. As a result, the company has started to make some serious inroads, by landing new clients and slowly but surely grabbing share from Red Hat.

Novell's balance sheet is adequate. It has about $3.95 per share in cash, and just under $2 per share in debt. As things stand now, Wall Street expects the company to earn 14 cents per share for the fiscal year ending 2006, and 18 cents per share in fiscal 2007.

But don't open your wallet just yet. My gut tells me the new chief executive is going to write off as much as he can over the next few quarters in an effort to start his tenure with a clean slate. He may write off some redundant inventories, and he may even have to make some allowances for severance pay if he decides to trim the staff, as new execs often do when attempting a turnaround, or a new major sales push. If nothing else, it makes next year's results look all the better.

In any case, I'd wait another quarter before jumping in. I suspect by that time Hovespian will offer Wall Street some updated earnings guidance, and that he'll be eager to talk to the press about new customers the company is picking up from Red Hat. Either of these types of announcements could drive the stock higher. So be ready, because I think we are near a bottom here, and once this stock does turn, it could have the potential to double from here.

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