A Handful of Big-Cap Buys

02/09/2007 12:00 am EST

Focus:

John Dessauer

President, John Dessauer Investments, Inc.

John Dessauer's shopping cart is filling up this month. In his most recent missive to his subscribers, he offers investors a varied selection of big-cap, well-known companies ripe with investment potential during the next year...

"Rite Aid (RAD NYSE) fell below $6 because Goldman Sachs said to sell Rite Aid, amid worries about the valuation and the risks associated with the acquisition of the Brooks and Eckerd stores. Shareholders have now approved the acquisition. I agree that there are real risks, but Rite Aid management has a good track record. The long-term potential is attractive. My advice is to hold Rite Aid and buy more if the stock falls below $5.00.

"Cardinal Health (CAH NYSE) moved up nicely after the company announced second fiscal quarter earnings of $0.83 a share, excluding one-time charges. Wall Street was expecting just $0.78. Cardinal also announced the sale of its Pharmaceutical Technologies unit for $3.3 billion in cash. The net proceeds will be used to buy back shares. That will likely reduce share count by 10%, boosting earnings per share. One major Wall Street firm upgraded Cardinal to a strong buy. Others have been raising estimates. For the fiscal year that ends June 30, current estimates are $3.55 to $3.65. For fiscal 2008, current estimates are $4.05 to $4.20 and I expect them to be raised again. Cardinal's stock is headed for $85 in 12 months or less.

"Philips Electronics (PHG NYSE) reported fourth quarter earnings of $0.59 a share, boosted by a lower tax rate. For 2007, EBITDA will rise to 7.5% of sales from 5.1% in 2006. I calculate 2006 earnings at $1.13 a share. Estimates for 2007 are $1.67 to $1.77. Philips bought back $3 billion of its shares in 2006 and can buy back $2 billion more in 2007. The dividend for 2006 was raised to $0.60. New lighting technology will fuel above-average growth.

"Wachovia Corp. (WB NYSE) reported fourth quarter results of $1.21, beating analysts' expectations by $0.02. Revenues were 31% better than the final quarter of 2005. The acquisition of Golden West is already contributing to revenue and profit growth. There are concerns that the housing slump will slow growth this year. But Wachovia predicts that growth will continue, as the entire organization sells Golden West mortgage products. Wachovia finished 2006 with earnings of $4.70 a share. The estimate for this year is $5.05 to $5.20 a share. I expect actual results to be at or above $5.20 a share this year. The dividend yield is 3.6%. The earnings yield, based on 2006 actual results, is 8.3%. Wachovia is another big-cap value investment."

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