Today's 3 Stock Picks: AIG, BBY, NT

AIG: More Handouts From the Feds

The government's decision to expand its role in the bailout of American International Group (AIG) spurred investors to pick up shares of the battered insurer on Monday.

Increased federal assistance represents a vital step for AIG, new CEO Ed Liddy said in a Monday conference call, in which he announced a plan devised between the insurer, the Treasury Department, the Federal Reserve Board and the Federal Reserve Bank of New York. Treasury will buy $40 billion worth of preferred shares, and the Fed will create two new lending facilities to help AIG remove toxic assets from its balance sheet.

"We believe this plan is win-win. It sends a strong signal to our policyholders, to governments, and to regulators around the world, to our business partners and counterparties that AIG is in fact on the road to recovery," Liddy said. "It gives us a durable capital structure, both now and in the future, it addresses the liquidity issues that have threatened AIG, it gives us greater financial flexibility to complete our restructuring for the benefit of all of our constituencies, it gives U.S. taxpayers a very attractive return on preferred stock and debt investments in AIG, as well as the potential for gains on asset purchases and the future appreciation in AIG common shares, which they own."

Rob Haines, an analyst at CreditSights, a New York capital structure research firm, wrote Monday that owners of AIG bonds will especially benefit from the expanded rescue plan.

"Specifically, the restructured bailout should give AIG the flexibility to sell assets in an orderly manner for closer to their intrinsic values rather than fire-sale price," he wrote "Moreover, we believe that it will help to restore confidence in AIG's global franchise." He noted that the price of credit default swaps dropped by half immediately after the announcement.

The AIG news is a welcome development for the markets, which are watching every move the lame-duck administration makes as it struggles to establish consistent practices to stabilize the financial-services sector. Assistant Secretary of the Treasury Neel Kashkari on Monday addressed a conference at the Securities Industry and Financial Markets Association in New York, about the progress of the $700 billion Troubled Asset Relief Program (TARP).

Other pillars of the financial-services industry, notably Goldman Sachs (GS), remain vulnerable to the continuing market slide. Analysts now think its investments could trigger a loss in the fourth quarter.

Bottom Line: Buy
AIG is one of the few beneficiaries of federal largesse that has specific, directed plans for recovery. It won't be a smooth ride, but anyone investing in financial services now should already know that.

Best Buy: Circuit City Succumbs

Despite Circuit City's (CC) decision to file for bankruptcy protection, it's biggest rival in the consumer-electronics space, Best Buy (BBY), failed to benefit on Monday from the demise of a competitor due to the disastrous state of the American shopper.

"We recently have taken intensive measures to overcome our deteriorating liquidity position," Circuit City Chief Executive James Marcum said in a prepared statement. "The decision to restructure the business through a Chapter 11 filing should provide us with the opportunity to strengthen our balance sheet, create a more efficient expense structure and ultimately position the company to compete more effectively."

The Richmond, Va.-headquartered retailer last week announced the closure of 155 stores, but even reducing its outlets by 21% wasn't enough to dig the company out of its dismal condition.

Stacey Widlitz, an analyst at Pali Research, wrote Wednesday that consumer spending remains so inhibited that even clearance prices weren't driving sales.

"At this point the liquidation may drive traffic but current price discounts did not create a sense of urgency to buy," she wrote. "In the current economic environment, we believe 5-20% off will not be enough to prevent consumers from price comparison shopping, especially on the web. Even if the liquidation does yield the lowest prices, some stores are willing to price match."

Morningstar analyst Brady Lemos last week said the store closings were a last gasp indicator of the company's precarious health, writing Thursday that "Circuit City's business model is not sustainable and that we would not recommend owning shares at any price."

Widlitz says that even though Best Buy (BBY) has been taking market share from Circuit City, as has Wal-Mart Stores (WMT), one rival's woes do not necessarily equal great success in a weak economy. Same-store sales, or comps, have been weak throughout the retail sector in September and October.

"If your biggest competitor is comping down in double digits month after month and that isn't enough to make your comps go higher, certainly your business is under pressure," she says.

Bottom Line: Hold
If you still own Best Buy shares, selling into weakness remains a bad idea. (If for some reason Circuit City remains in your portfolio, get whatever you can for whatever is left.)

Nortel Networks: Frayed Connections

A big earnings miss and warnings of even worse results pushed shares of Nortel Networks down Monday.

Its Ethernet network revenues dropped sharply, compounding the one-time charges of $3.2 billion. Exclusive of the charges, it would have lost 30 cents a share, down from a nickel a share profit in the year-ago quarter.

The Toronto-headquartered company will also lose a handful of senior executives, including its executive vice president of global sales, chief marketing officer and chief technology officer. More immediately, it's laying off 1,300 workers and extending a hiring freeze into 2009.

President and CEO Mike Zafirovski said on a Monday call that a grim outlook presented on Sept. 17 has only worsened. Two months ago, "it was clear that the business environment in which Nortel operates was seeing a sustained and expanding economic downturn. And that there was a pressure on both the carrier CapEx spending as well as certain enterprise customers, [who] were deferring new IT and optical investments," he said. "I don't see a need to reiterate worsening condition from which you have heard from many other companies or the extreme volatility and financial, foreign exchange and credit markets globally."

Nortel said results would likely come at the low end of its previous estimate, thanks in part to a rise in the U.S. dollar against the Canadian dollar. The company said its outlook is now so uncertain it won't give sales or earnings forecasts for 2009. In September, Nortel said it expected a drop in sales between 2% and 4%. The company also said it had no update on the proposed sale of its money-losing Metro Ethernet business.

Michael Urlocker, at GMP Securities, wrote Monday that Nortel's plans to sell off assets may have spurred wavering customers to cancel orders. He wrote that the layoff estimate may be low.

"We see no clear path to sustained profitability and we take little comfort in the executive team's plans or track record," he wrote. "Cash from operations is low and insufficient to cover interest payments. In an environment of constrained capital, Nortel has low financial flexibility."

While Nortel's likely choice of cutting research or delivering lower earnings, causing investors to doubt the company's strategy, isn't much of choice, Urlocker also says the entire sector is facing a rough stretch.

"We believe that low growth, high competitive pressure and an absence of new technology drivers will be the norm for much of the telecom industry for the next two to three years, with the exception of the rebounding optical segment," he wrote. "As a result we expect the sector will increasingly be considered a commoditized industry driven by grinding out costs, much as it was before the Internet and telecom boom of the 1990s."

Bottom Line: Hold
Avoid selling in the midst of bad news, but set modest expectations for any sort of gains toward recovery. This stock has had a brutal slide, and should not be seen as a bargain buy.