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Gene Marcial's Stock Picks

Marcial: Gabelli's Top Five Bets

At the beginning of every quarter since 2006, investor Mario Gabelli's stockpicking team has gone out on a limb to highlight five stocks as its top choices for the next three-month period. Incredible as it may seem, the picks invariably outperform the market.

Here's the score: Since starting its "Focus Five" stock picks on Jan. 31, 2006, Gabelli's choices have posted an average gain of 133.8%, vs. a loss of 14.6% for the Standard & Poor's 500-stock index over the same period. And for this year's third quarter, Gabelli's picks again smartly outperformed the market, advancing an average 9.48%, vs. the S&P's 4.93%.

The Gabelli Five in the third quarter were Hansen Natural (HANS), which rose 16.6%; Walgreen (WAG), which climbed 21.8%; Coca-Cola (KO), up almost 7%; Waste Management (WM), 6.3% higher; and SCANA (SCG), which lost 4.3%.

For the fourth quarter, Gabelli spotlights five diverse stocks: Constellation Brands (STZ), currently trading at 15; DirecTV Group (DTV) at 26; MasterCard (MA) at 219; Millicom International Cellular (MICC) at 62; and Safeway (SWY) at 22.

trading at a discount Daniel Miller, who heads the Gabelli team that researches and analyzes the stocks for Focus Five, points out that each one trades at a relative discount to its intrinsic value and could be propelled higher by events in the near term.

Constellation Brands, a global producer and marketer of alcoholic beverages, controls 15% of the U.S. wine market and should benefit from the inclination of consumers to trade down to mid-priced wine brands, says Miller. He notes that the stock, now at 15, is selling at a significant discount to its peers, despite the company's leading market share and profit margins of about 20%. He says that's because Constellation shares don't reflect the company's 50% stake in Crown Imports, a leading U.S. beer importer. Miller figures Constellation's intrinsic worth is 25.

DirecTV, a major U.S. provider of direct broadcast satellite TV service, with more than 18.3 million subscribers in the U.S. and nearly 6.2 million in Latin America, has significant growth potential, according to Miller. He says its cash-generating operations are driven by the company's distinct programming, its technology, and its customers.

Miller says that when DirecTV's merger with Liberty Media is completed soon, "we expect to see a material stock repurchase and a spin-off of its DirecTV Latin American unit." But the big kicker in the stock, he points out, is the possibility that DirecTV may end up being acquired by or merging with a large telecom company. Miller puts the intrinsic value of the company at 48.

opportunities abroad MasterCard, a global leader in credit-card transaction processing and brand licensing that operates in more than 210 countries, continues to use its strong global network to expand its reach, the Gabelli team notes. Miller expects that with cost-cutting and operating efficiency, MasterCard should see profit margins reach 45% in 2011, up from 39% in 2008. Another positive is the potential for further growth from the company's debit cards, which MasterCard is pushing as a replacement for cash transactions. Miller estimates MasterCard's intrinsic value to be 310.

Millicom International Cellular, one of the largest developers and operators of cell-phone systems worldwide, with operations primarily in Latin America, Africa, and Europe, is focusing on further expanding in those areas, notes Miller. He calls Millicom one of the fastest-growing cell-phone companies in the world.

Broadband is a significant growth opportunity for the company, Miller says, because penetration of fixed and mobile broadband is still in the low single digits in the markets where the company operates. He puts Millicom's intrinsic value at 95.

Safeway, a major food retailer that operates about 1,760 stores in the U.S. and Canada, has transformed 75% of its stores to offer consumers a better and more convenient shopping experience, says Miller. It has also built robust private-label products that generate high margins, he says. Safeway's Blackhawk gift card business alone, he notes, is worth $5 a share. On the financial side, the company is using a significant part of its free cash flow to reduce debt, repurchase shares, and support its dividend, which currently yields 1.78%.

The underlying principle behind the Gabelli Focus Five stock picks is pure value investing—buying shares of companies with assets that are worth more than the price of their shares. That is a basic tenet of the firm's investment strategy.

Nobody can guarantee positive investment results, but Gabelli's Focus Five selection has an impressive record of beating the market. For all of 2008, for example, the Focus Five picks posted an average gain of 9.42%, vs. the S&P 500's loss of 38.3%.
Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.

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