Today's 3 Stock Picks: ACE, PVH, IMAX

Depositary shares of reinsurer Ace Ltd. (ACE) dropped sharply Wednesday after a downgrade from Citigroup analyst Joshua Shanker highlighted worse than expected losses in the future.

The insurance sector's heavyweights, notably American International Group (AIG), stand in the second rank of businesses battered by the global financial crisis. Their extensive holdings have lost value as markets slid, and many of them are heavily invested in credit default swaps and other problematic securities that continue to amplify investor concerns about their losses.

In the case of Zurich-based Ace, Citi's Shanker zeroed in on a dramatic increase in the amount of money at risk from reinsurance deals on variable annuities, writing Tuesday that there's greater potential for losses than the company had earlier indicated. He called for more disclosure about the number of policies the company underwrites.

"The contracts Ace has engaged will cost it, should the markets decline in an unexpected and extended way," he warned. Shanker cut his rating on the stock to Hold from Buy.

Keefe Bruyette & Woods analyst Matthew Rohrmann wrote Tuesday that AIG's mounting woes may give Ace an opening to take market share away in the lucrative excess and surplus insurance market, which gets about $40 billion worth of premiums in the U.S. The top 10 players, of which AIG is ranked first and Ace is ranks No. 5, command 64% of the market.

"Given the recent turmoil involving AIG, we believe 2008-2009 could be a year where the competitive landscape becomes more diverse," Rohrmann wrote.

Bottom line: Buy
If you've stayed with this sector, you either understand the intricacies of the business or you a have a long-term investment horizon. While Ace is a bit more vulnerable with highlighted potential liabilities, its business remains the same; actuarially speaking, it could pick up market share from a weakened competitor.

Apparel maker and retailer Phillips Van Heusen (PVH) saw lower fiscal third-quarter profits but still beat Wall Street estimates, sending shares up early Wednesday before management comments on the rising dollar wrinkled the upswing.

The New York company owns the popular Calvin Klein brand, which was a major source of earnings and revenue in the quarter, according to CEO Emanuel Chirico. Royalty revenue for the brand grew 8% in the quarter, but Chirico warned that foreign currency adjustments had started to make an impact and that it would increase considerably over the next several months. He said Calvin Klein revenues would be flat for the current quarter.

About $100 million of the brand revenues come from overseas, and about 80% of that is vulnerable to the rising value of the U.S. dollar as emerging market currencies and established currencies decline. The euro, for example, was worth $1.47 a year ago. Today it's at $1.26.

"So we have $80 million being impacted by that business," Chirico said on a Wednesday conference call. "Given where foreign currencies are today, when we look at our total basket of currencies that impact our business, we are anticipating for the next 12 months, that our business will be impacted negatively 15% to 20% on that $80 million of business."

That's a big drop, but the impact wasn't unexpected. Wedbush Morgan analyst Jeff Mintz wrote in a Nov. 11 preview note that that foreign currency would hit earnings, but that the stock was still a buy because its fiscal 2009 guidance was "extremely conservative."

Other brands, such as Izod and DKNY, haven't shown strong results, but the company did cut back some lagging retail areas, closing its Geoffrey Beene stores at the end of the fiscal year.

"Lowered 2009 estimates represent what we believe is worst-case scenario for legacy business," Mintz wrote last week. "As our checks on the company's legacy brands, including IZOD, have continued to be weak, we are reducing our 2009 EPS estimates to incorporate what we believe is a worst-case scenario including declines in sportswear and outlet sales, weaker gross margins and limited expense leverage despite the elimination of the Geoffrey Beene outlets."

Bottom Line: Hold
This stock will get frayed despite its strong management, but it's less vulnerable to a bad economy than a pure retail play. The currency hit won't help, but it might be worth watching for big dips that will make this a longer-term winner.

Superheroes and holiday chestnuts have been big news for Imax (IMAX), whose giant screens will show the first of five feature films secured in a deal with Walt Disney (DIS) announced Wednesday.

Disney's "A Christmas Carol," a 3-D version of the Charles Dickens classic, will be shown as a 2009 holiday release. Actor Jim Carrey will star in the Robert Zemeckis film, the first from the Walt Disney Studios slated for Imax.

"Entering into a five-picture agreement with Walt Disney Studios helps us ensure that our network has an outstanding slate of movies going forward," Imax co-Chairmen and co-CEOs Richard Gelfond and Bradley Wechsler said in a prepared statement.

The company earlier this month announced revenue grew 13%, led by the strong performance of "The Dark Knight" at Imax theaters. Although it still lost 5 cents a share, due mostly to the cost of its debt service, that was better than Street estimates and achieved an operating margin of 8%, compared with negative 10% in the prior-year quarter.

"During the quarter, we feel we demonstrated that the key drivers of our business -- our transition to digital, our transition to a recurring cash flow joint revenue sharing model and our ability to finance the roll-out of our digital systems -- are fundamentally on track," the top executives said in a prepared statement released Nov. 6. "In a difficult environment, we delivered improved financial results, which primarily reflect the strength of 'The Dark Knight: The IMAX Experience,' coupled with operating expenses that were flat versus last year."

Jeffrey Blaeser, an analyst with Morgan Joseph, wrote Nov. 7 that the ongoing transition to digital projection creates a backlog for Imax that should insulate the company from ongoing broader economic woes.

As the industry shifts, he added that momentum will help drive revenue through stronger offerings.

"While there will always be underperforming releases, Imax's apparently increasing exposure is delivering more high-profile titles and limiting its exposure to underperforming releases," he wrote. "Whereas 'Speed Racer' and 'Shine a Light' may have cost Imax money in 2008 (factoring in the roughly $1million cost to convert a film to Imax), we currently see few weak links in the 2009 schedule. Longer term, should Imax release 10 to 12 films per year, exposure to such releases should be limited."

Bottom Line: Buy
Imax offers moviegoers something new, and it's well positioned to take advantage of shifts in presentation technology. If next year's Jim Carrey vehicle delivers, even Scrooge would be pleased to have Imax in his portfolio.