Two Bargain Stocks for Your Portfolio

08/18/2006 12:00 am EST


Richard Band

Editor, Profitable Investing

Value investor Richard Band has gone bottom fishing with two large-cap companies that have fallen out of favor with Wall Street analysts, betting that a contrarian position might be just the thing for investors looking for bargains…


American International Group (AIG NYSE) is a rare bargain! This giant insurer ($400 billion of assets) is trading at less than 11x estimated 2006 profits, an astoundingly low P/E. 1988 was the last time AIG sold at such a meager valuation over the course of an entire year.


“It’s obvious what’s holding the stock back. Wall Street is terrified at the prospect of another devastating hurricane season, which would require insurance companies to shell out billions. While I can’t predict the weather, I do know how the stock market deals with scary but well-foreseen events, usually by overcompensating. And whether or not the event takes place, the financial consequences are generally far less dire than the market had “priced in.”


“Thus, I’m convinced that, absent a hurricane worse than Katrina, AIG shares will rebound by the end of this year. Over the next two or three years, AIG could deliver a total return (price gain plus reinvested dividends) of 60%-80%.”


Time Warner’s ( TWX NYSE) Dick Parsons—as luck would have it—arrived as CEO of one of the world’s premier media conglomerates in 2002, amid a searing bear market. Although he has done a superb job of cleaning up the mess bequeathed him by Gerry Levin, the investment community won’t give him any credit. Even Carl Icahn, the corporate rabble-rouser who bought a sizable block of TWX shares last year, seems to have folded his tent and drifted away.


“I’m more hopeful. TWX’s stable of print publications (including flagship Time magazine) may not pack the kind of growth wallop they once did, but print still generates gobs of cash. On the electronic side, the company is a powerhouse in cable, originating its own content as well as delivering that of others. And the Warner Bros. movie studio continues to crank out ample profits. Right now, investors are fretting over the future of Time Warner’s America Online business, and whether TWX may offer the service free in hopes of capturing a much larger share of the Internet content market.


“Undoubtedly, TWX would lose some revenues—at first. Soon, though, assuming an increased audience, the company could begin to charge higher advertising rates, thus becoming substantially more profitable. Meanwhile, TWX shares are trading at a steep discount to media peers. I figure the stock could jump almost 50% before reaching the same valuation as rival News Corp—a lot of room to run!”

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