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It's getting tougher to find bargains amid surging stock markets, but investors can still find laggards that have potential.

Out-of-favour stocks could return to former glory because of catalysts such as new leadership or fresh products. Mispriced securities could eventually see their values rise as market participants do more homework.

Because battered names can offer a margin of safety, we asked five portfolio managers for their top contrarian picks.

Microsoft Corp.

• 52-week trading range: $32.15 to $47.02 (U.S.)

• Recent close: $46.52 a share, on Sept. 17

• Annual dividend: $1.12 a share

A new chief executive and an activist investor on its board are pushing the software giant in a new direction that should help its stock regain its former peak of $58 a share, says Larry Sarbit of Sarbit Advisory Services, based in Winnipeg. "The stock has gone nowhere since 1999 because of mismanagement. A lot of its consumer business [like the Zune media player] became a cash drain."

The Redmond, Wash.-based company is often viewed as a Windows personal computer business, but nearly 70 per cent of its earnings stem from the enterprise market, he noted. The latter includes sales of its Office productivity software suite, which offers a cloud-based service. It provides recurring revenue as more is sold by subscriptions. Microsoft, which is now focused on cloud-computing, has a ton of cash on its balance sheet, is buying back shares and raising dividends, he said. Its stock has been rising and should not take long "to exceed its old high of $58."

Navient Corp.

• 52-week trading range: $15 to $18.28 (U.S.)

• Recent close: $17.82 a share, on Sept. 17

• Annual dividend: 60 cents a share

Navient shares offer a buying opportunity because they have been largely ignored after being spun off in April from student lender SLM Corp., commonly known as Sallie Mae, says Tim McElvaine of McElvaine Investment Management, in Victoria. "Navient doesn't have a track record. … It wasn't really a growth story so people weren't particularly interested."

But Navient, which is based in Newark, Del., owns and services $100-billion in government-guaranteed student loans and $30-million in private student loans, he noted. "The business is not particularly exciting," but its stock trades below its liquidation value of about $20 a share, so there is built-in margin of safety in addition to trading cheaply at about eight times earnings, he said.

"If they are able to acquire additional companies or more loans to service, which is part of their business plan, you are not paying for that today in the stock price. …Over three to five years, I think the stock could double."


• 52-week trading range: $41.30 to $53.48 (U.S.)

• Last close: $46.23 a share, on Sept. 17

• Annual dividend: $2.31 a share

BP shares are worth a look after tumbling recently on concerns that the company could face up to $18-billion in fines for its role in the 2010 Gulf of Mexico oil spill, says Lorne Steinberg of Lorne Steinberg Wealth Management, based in Montreal. Despite a U.S. court ruling blaming the British oil group for being "grossly negligent," it could take years before there is a final decision because BP is appealing, he added. Any fine could be lower, while Britain-based BP has a strong balance sheet to weather any financial penalty, he added.

Meanwhile, the market is also concerned that part of its oil production comes from Russia, which is facing sanctions by the West over the Ukraine crisis. With a 5-per-cent dividend yield, BP shares also trade cheaply at nine times forward earnings, while the company is also buying back stock. Within two years, BP shares could return to their 2010 peak of $62 a share, said Mr. Steinberg, who has been buying more BP shares recently.

Deere & Co.

• 52-week trading range: $80.76 to $94.89 (U.S.)

• Last close: $83.57 a share, on Sept. 17

• Annual dividend: $2.40 a share

Deere shares are a bargain following a sharp selloff from a high of $94 earlier this year as declining crop prices make the near-term outlook for the giant farm equipment maker more uncertain, says Robert Gill, a portfolio manager with Lincluden Investment Management, based in Toronto. Falling farm cash receipts will discourage farmers from buying more agricultural machinery, while the U.S. Department of Agriculture is calling for lower commodity prices through 2016, he added.

"We have taken a position in the name because we have a very long-term view." Deere, which is based in Moline, Ill., has been around since the mid-1800s and has an iconic brand." The company, which has raised its dividend annually since 2003, has a strong balance sheet and high return on equity, he noted.

"You can buy all of that with a single-digit multiple [nine times trailing earnings] and a 3-per-cent dividend yield while you wait for capital appreciation. … We feel the company is worth over $110 a share."

Avigilon Corp.

• 52-week trading range: $15.93 to $34.50 (Canadian)

• Recent close: $19.65 on Sept. 17

• Annual dividend: none

A buying opportunity has emerged for shares of the provider of high-definition surveillance systems now that its stock has fallen on concerns about management turnover, says Frank Mersch of Front Street Capital, based in Toronto. He sold his Avigilon shares, which he bought for $4.50 a share, before they collapsed in May. He felt the stock was "getting rich." Now he is looking for a new entry point.

"Around $18 a share looks like good value, but I do need to see management stabilize," he said. Three executives, including its chief financial officer, left within six months. He is also waiting for Avigilon's November results to see whether bottom-line margins are improving, as the company has been more focused lately on gaining market share. He wants to see Avigilon, which is based in Vancouver, make more acquisitions like its purchase of VideoIQ, which makes video analysis software that can detect suspicious activity. The market likes to see recurring revenue that analytics can provide, he said.