Controversial "Keepers"

04/29/2005 12:00 am EST

Focus:

Richard Band

Editor, Profitable Investing

"Today’s market isn’t brimming with great growth stocks at steeply discounted prices," cautions Richard Band. "But a handful of bargains do stand out." Here, the value investor par excellence, discusses two controversial stocks that he views as "keepers."

"These are the foundation stocks to build your portfolio on—for next year, the next five years, perhaps the next decade or more. Following are two keepers I would accumulate in earnest at today’s prices. Both are the subject of controversy—virtually a requirement nowadays for a company to be underappreciated in the stock market:

"If I had to choose just one stock to live with for the next ten years, it would beAmerican International Group (AIG NYSE). AIG is the world’s largest insurance company and arguably the safest, with more than $80 billion of shareholder equity. Lately, AIG, together with other insurers, has attracted a barrage of unwelcome publicity. So much so, in fact, that its 79-year-old CEO, Maurice ‘Hank’ Greenberg, has agreed to step down, handing over the reins to a younger lieutenant, Martin Sullivan. To date, however, none of the investigations call into question AIG’s financial soundness or impair the company’s long-term growth outlook. Meanwhile, because of the regulatory cloud, the stock is languishing far below its historical value. In fact, AIG is selling for only 11 times this year’s estimated earnings, roughly the same forward p/e ratio as in December 1994, when the Dow stood at 3700. From today’s level, I’m looking for a double over the next three or four years.

"Controversy has also sired a bargain at Citigroup (C NYSE). As the fast-growing countries of Asia open their banking systems more fully to foreign players, this behemoth will be among the biggest winners. So what’s the controversy? Last year, regulators shut down its private-banking operation in Japan, leading some to ask whether other scandals might be brewing beneath the surface. In addition, with arch-rival Bank of America having now established a coast-to-coast network of retail branches, analysts are wondering what Citigroup will do to catch up. While these are genuine concerns, I’m confident they’ll pass. This world financial superpower is trading at only 11 times estimated 2005 earnings—a steep 30% discount to the S&P 500 and well below the 17 p/e that it fetched in the late 1990s (when bank stocks were out of fashion). Don’t overlook the generous 3.8% dividend yield, either. Citigroup merits a buy at $50 or less for a target of $80 to $100 by 2008–2009."

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