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Inside Wall Street


Smart Buys in Ammo and Retail

With the economic downturn now more than 13 months old, some savvy investors are assuming that the market's relative calm lately may be the forerunner of a slow but sustained upturn in stock prices. Hinting at this stability, they say, is the gradual rebound in the number of stocks trading above their 200-day moving average.

The Obama Administration is "ushering in a heightened measure of hope and optimism," a welcome change after the deep pessimism that has engulfed the U.S., says Stanley Nabi, a veteran asset manager who is now vice-chairman and chief strategist at Silvercrest Asset Management Group, which oversees $8.5 billion. In each of the past 10 years, Silvercrest's big-cap portfolio has outscored the Standard & Poor's 500-stock index. One factor that supports a favorable market outcome in the coming months, Nabi notes, is the dividend yield on companies in the S&P 500—plus or minuswhich, for the first time since 1956, far exceeds the interest rate on 10-year U.S. Treasuries. Moreover, stock prices of many companies are lower than the replacement cost of their underlying assets, says Nabi, formerly a top strategist at Credit Suisse (CS).

But in the current environment, where the market doesn't distinguish between small- and large-caps, or value and growth sectors, stocks should each be vetted on their individual merits and not on the outlook of their respective industries, advises Nabi. Applying such an approach, there are "rewarding purchase candidates" in several industries, including defense and retail, that stand out, he says.

In defense, Nabi has loaded up on shares of Alliant Techsystems (ATK), the Pentagon's leading ammunition supplier, as well as the world's largest maker of solid-fuel rocket engines. And in retail, he's keen on Wal-Mart Stores (WMT), the world's largest retailer.

Alliant Techsystems, says Nabi, is an undervalued gem whose shares tumbled to 84.27 on Jan. 27 from a 52-week high of 114.29 on May 2. "There is no reason for the stock's drop, as sales and earnings are on the rise," he says. S&P rates Alliant a buy, with a target of 105.

Wal-Mart hasn't been spared in the market's long decline, skidding to 48.72 a share on Jan. 20 from a 52-week high of 63 last Sept. 19. Nevertheless, Nabi figures it's way undervalued because the company keeps boosting market share despite the tough economy, and continues to post higher earnings. "Consumers flock to Wal-Mart to look for value," says Nabi. And its products are now more upscale, although still priced at ample discounts, he notes.

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.

Raser, a Play in Geothermal Juice

Investment opportunities in renewable energy abound, but one that is still getting scant attention is geothermal energy, the kind that produces heat from under the ground. Adam Adelman, an energy analyst at Capstone Investments, laments that "geothermal has not gotten the press it deserves." On a cost basis, he says, geothermal is a preferred alternative energy source for electric utilities.

One pure play in geothermal is Big Board-listed Raser Technologies (RZ), which Adelman rates a buy. (Capstone expects to do business with the company.) Two months ago, Raser opened a geothermal plant in Utah, which is already selling electricity to Anaheim, Calif. Raser will soon complete construction of another plant in New Mexico, which expects to supply electricity to Phoenix. Raser's stock, now at 3.45 a share, is worth 7, Adelman figures.

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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