Gene Marcial's Stock Picks
Marcial: A Look at Gabelli's Fab Five
A group of analysts at investment firm Gabelli & Co. is doing just that, selecting five equities every quarter as its "Focus Five" for clients, including portfolio managers at hedge funds and institutional investment firms. The Focus Five has demonstrated how judicious and smart analysis produces stunning gains.
"The performance of the Focus Five has been consistent every year, beating the market in each quarter of every year," says Dan Miller, vice-president and head of institutional equity sales at Gabelli.
The proof of the pudding: Since its inception in January 2006, the Focus Five has posted a hefty total gain excluding dividends of 113.95%, vs. a loss of 18.61% by the Standard & Poor's 500-stock index. In fact, the Gabelli picks have outperformed the S&P 500 every year since 2006.
Homing In on Intrinsic Value Miller says the common thread among the stock picks is that each trades at a relative discount to its intrinsic value and has "identifiable near-term catalysts" to help drive the stock price higher.
The Focus Five selected for this year's second quarter were Janus Capital (JNS), which gained 36.19% during the period; Liberty Media (LMDIA), up 14.87%; Millicon Cellular (MICC), up 53.01%; Republic Services (RSG), up 26.67%; and Ticketmaster (TKTM), up 53.99%.
For the third quarter, Miller says the picks are Hansen Natural (HANS), sales leader in the U.S. energy drinks and fruit juice sector; Coca-Cola (KO), the world's largest soft-drink company; SCANA (SCG), an electric utility operating in South Carolina and North Carolina; Walgreen (WAG), the largest U.S. retail drugstore chain in revenues; and Waste Management (WM), the largest U.S. waste disposal company.
Miller believes the current crop of Focus Five stock picks should again outperform the market. Affiliates of Gabelli own shares in the five companies.
Hansen, currently trading at 33 a share, has a private market or intrinsic value of 54 a share, says Gabelli analyst Damian Witkowski. "Hansen continues to build on its status as the volume leader in the energy and fruit juice industry," he says. Witkowski expects the company to earn $2.30 a share in 2009 and $2.75 in 2010.
Emerging Markets Should Drive Coke The stock of Coca-Cola, trading at 49, isn't too far from its 52-week high of 55.84 reached in mid-August of 2008, but Witkowski puts its worth at 60. It is still "attractively valued by most historic measures," he says, and should deliver yearly earnings growth of 10.5% through 2013, and produce free cash flow of $30 billion. Growth, he adds, will be driven by opportunities in the emerging markets.
SCANA, now trading at 33 a share, is worth 43, according to Gabelli analyst Tim Winter. SCANA is a "low-risk, traditional electric and gas utility," he says, that should earn $2.85 a share in 2009, $3 in 2010. and $3.20 in 2011. SCANA could be a play on the "new nuclear" theme as construction on two 1.117-megawatt nuclear units is scheduled to begin in early 2011, with one of them expected to come on line in 2016.
Walgreen, currently trading at 30 a share, also is expected to outperform the market. Gabelli analyst Jeff Jonas expects the retail drugstore chain to produce double-digit earnings growth next year, with significant free cash flow driven by steady revenue growth and reduced operating costs. Walgreen, says Jonas, should earn $2 a share in 2009 and $2.26 in 2010. He puts its value at 49.
Waste Management has been able to expand margins in spite of declining sales volume, says Gabelli analyst Tony Fritz. The company has been raising its prices, he notes, at 3.75% a year in the past three years, and it expects the trend to continue. Another positive, according to Fritz, is the company's repurchasing of its own shares. It has announced stock buybacks worth $400 million for the remainder of 2009, he says. The stock hit a 52-week low of 22.10 on Mar. 9 but has since bounced back to 28. Fritz puts Waste Management's worth at 43.
Gabelli has had a solid reputation and dependable long-term track record, so investors may want to listen carefully when the firm offers up its quarterly quintet of top stock selections. We'll check in later this year to see how the current bunch have fared.
Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.