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Will Arena Be Headed For Fat City?


Diageo (DEO) may be the perfect elixir for shot nerves in a jittery market. Randy Haase of the Baron Fifth Avenue Growth Fund (BFTHX) likes the London company for its consistent profit growth of 12% to 14% a year and its dividend yield of 2.5%. "Investors are looking for quality blue-chip global growth companies," says Haase, who started buying in May, 2006, at 67. He says the stock, now at 80.18, could appreciate 20% to 25% annually for several years. Two trends behind Diageo's growth: Growing numbers of young people prefer mixed drinks to wine or beer, and they order cocktails by brand name. Diageo's top seven brands (Baileys Irish Cream, Captain Morgan, J&B, Johnnie Walker, Jose Cuervo. Smirnoff, and Tanqueray) account for two-thirds of its sales volume and are among the world's top-selling brands. In China, for example, sales of Johnnie Walker at June's fiscal year end are expected to be up 70% year over year. "It's a real status symbol in Asia," says Haase. The stock is a top holding among Baron Asset Management's large-cap portfolio of $210 million. Ann Gurkin of Davenport Equity Research rates the company a strong buy. Her 12-month price target is 100.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them. As household budgets get squeezed, consumers are likely to spend more at discount retailers--and TJX (TJX), owner of T.J. Maxx, is one of the best bets. The company has reported favorable comparable-store sales for all but two of its 30 years in business. Says Patrick McKeever of researcher Avondale Partners: "It's a value stock with momentum." He sees the stock, now at 29.77, at 34 in 12 months. The Framingham (Mass.) outfit--offering trendy fashions and home furnishings at 20% to 60% below department stores--hit the skids earlier this year when it announced a systems breach that potentially compromised the data of more than 40 million customers. Although initial profits for the quarter ended July 31 were up 30% over last year, the results were hit by a charge of $118 million. McKeever thinks TJX "did a great job of damage control; it didn't hurt customer loyalty." The company also raised earnings expectations to $1.84 to $1.88 a share for the rest of the year. Plus, TJX plans to buy back $550 million in stock this year. Bank of America's (BAC) Dana E. Cohen calls the stock "the most defensive play in apparel retailing" and pegs it at 37. Allison Fisch of New York's Pzena Investment Management, which manages $30 billion, is a major shareholder. "We see significant upside from here," says Fisch.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

In September, Arena Pharmaceuticals (ARNA) will announce the results of a six-month safety review for its lead drug. All eyes are on the obesity drug, lorcaserin, which is in a large phase III test, with more than 3,000 patients. "We are at an inflection point for the stock in the next month," says Patrick Moriarty of Fortis Securities. "So far, all the data have been positive; lorcaserin could be a multibillion-dollar drug." Moriarty's 12-month target for the stock, now at 12.98, is 25. Mark Monane, a biotech analyst at Needham, who sees the stock at 23 in a year, also anticipates upbeat news next month. "We do not anticipate any major safety issues." Arena reported revenues of $4.8 million in the second quarter with a net loss of $39.1 million, or 64 cents a share. With $371 million in cash and equivalents and an annual burn rate of $150 million to $160 million, the company has a cushion to take it into 2009, says Moriarty, whose firm has a banking relationship with Arena. Lorcaserin is expected to hit the market in 2010.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.


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