On the Rebound

02/09/2007 12:00 am EST

Focus:

Jon Markman

Editor, Trader's Advantage

Top-flight stock-picker Jon Markman is bargain-hunting. In his latest issue, he profiles two companies whose shares have recently retraced, but now are showing signs of renewed investor interest, portending optimism for the months ahead...

"If ever there was a company leveraged to all sorts of bad things in the economy, it is Florida Rock (FRK NYSE), a leading US producer of construction aggregates, cement and concrete with a particular focus on the Southeast. There's a residential real estate crash going on in Florida, and very little new inventory is being built. In anticipation of the plunge in new construction, FRK shares fell from $65 last May to $35 during the summer. But since the Federal Reserve stopped raising rates, and mortgage rates have stabilized, investors have started to look forward toward the possibility of a new up-cycle starting in the fourth quarter of 2007.

"The company reported fourth-quarter results slightly ahead of expectations in large part because of price increases and a big rise in road-building. In the near term, business is going to be relatively weak for FRK as the home-building market wrings out, but you should stay with the stock and add to your position on dips. My early-2008 target is $62, 15X my 2008 earnings per share estimate of $4.11. That would be a gain of 26% from the current quote.

"Rebounding from a terrible December is Gilead Sciences (GILD NASDAQ GS), a major biotech that develops and sells drugs to people suffering from AIDS and hepatitis. Shares hit a high of $70 in late November then traded down to a low of $61.92 in late December. That point turned out to be near the low, and after dithering a bit, the stock shot up after reporting a great fourth quarter.

"The key driver was market-share gains for its HIV franchise following last year's release of the Atripla therapy. GILD is the most powerful player in the fight against AIDS by helping patients battle HIV via drugs called Truvada and Viread. Now add Atripla, and it's a great 1-2-3 punch. Analysts report that Truvada is now prescribed to two-thirds of all new patients.

"GILD's quarterly cash flow was $1.2 billion, much of which will be plowed back into R&D. It has several new blockbuster therapies in trials and is trading at an all-time high. GILD will have a shot at trading as high as $82 over the rest of the year as investors discount the potential to earn $2.88 per share. You can start to accumulate GILD now if you're just joining us, but make sure to add on dips."

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