AOL (AOL): Bernie Schaeffer’s top stock for 2010

By Steven Halpern, TheStockAdvisors.com | Jan 05, 2010 | comment

"AOL (NYSE: AOL), formerly  America Online, is one of the most storied – and bloodied – names in the Internet sector," says Bernie Schaeffer.

Referring to skepticism surround its early December spin-off from Time Warner, the editor of Schaeffer's Research chooses AOL as his top pick for 2010, noting,  "From a contrarian perspective,  the current pessimism could have positive implications."

"AOL's merger with Time Warner in 2001 was hailed (by some) at the time as an innovative marriage of old and new media.

"But AOL’s dial-up Internet access model was already under pressure by the time of the merger, and the AOL and Time Warner cultures never meshed. 

"The merger is now regarded as one of the most disastrous in U.S. corporate history, losing more than $100 billion in market value. Steve Case, the deal’s architect , resigned the chairmanship  of the combined company two years later and left the board in 2005.

"Time Warner has been looking to rid itself of AOL ever since. So it was no surprise that Time Warner’s spin-off of AOL in early December 2009 was met with a heaping armful of skepticism. 

"We have seen multiple media outlets weigh in negatively on AOL, perhaps an indication of how Wall Street is currently viewing the stock. In fact, the shares were initiated at 'underperform' by a major brokerage house in December.

"Moreover, Zacks reports that the stock has earned one 'strong buy' rating, one 'hold,' and two 'strong sells.'   Therefore, we view the upgrade potential on AOL favorably.

"But AOL, with a market cap of only $2.5 billion, argues that it remains a strong brand. Its 80-plus Web sites attract 100 million unique visitors each month. It still generates cash through its Internet access business.

AOL has a new management team led by former Google exec Tim Armstrong. Armstrong wants AOL to differentiate itself from competitors by creating original content.  Yahoo,  Google  and others are largely aggregators of others’ content ; AOL generates 80% of its own content.

"Although we emphasize that we are no in way comparing AOL to Google, the skepticism greeting the spin-off is eerily reminiscent of what we saw around Google just prior to its initial public offering in 2004. hen the shares of GOOG quickly outperformed their low expectations, the bears quickly jumped on the stock’s bandwagon, pushing it even higher.

"OL's shares so far are bucking the widespread pessimism as they hover above short-term support at the 23 level.  From a contrarian  perspective, this pessimism could have positive implications if skeptics succumb to better  price action."

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