Back to the Basics

09/01/2006 12:00 am EST

Focus:

Richard Band

Editor, Profitable Investing

Another expert value investor, Richard Band, finds much to like about two old favorites who have lost their sparkle on Wall Street. But for savvy investors, the opportunity is ripe to pick them up at a discount…

 

“With the longer-term market outlook becoming about as favorable as it gets, you want to move your portfolio into a bullish posture. We’re allocating 70% of the model portfolio to stocks, our highest equity weighting in two years. Keep just enough bonds and cash to let you sleep well at night. Steer the bulk of your fresh money into high-quality, “household name” blue chips—the most undervalued sector of today’s market. Here are two fairly begging to be bought for projected gains in the neighborhood of 60%—80% by Election Day 2008.

 

“We originally snapped up FedEx Corp. (FDX NYSE) in July 2005. Back then, you’ll recall, Wall Street was fretting that soaring fuel prices would crimp transport companies’ profit margins. Without skipping a beat, FDX recouped its higher fuel costs through a surcharge—and our shares leaped 43%. Now $75 oil is surfacing the same old fears. Granted, the economy isn’t as peppy as it was a year ago, so it’s possible that even FedEx will feel the effects of a temporary slowdown over the next quarter or two. However, I’m willing to wager that this superbly managed outfit will be among the first to benefit when growth speeds up again in the new year. At a modest 15 times estimated earnings for the current fiscal year (ends May 2007), FDX is trading as if it were a plodding also-ran rather than an extraordinarily successful franchise that has nearly tripled its bottom line in the past five years. It isn’t often you can buy Tiffany quality at Wal-Mart prices, but FDX represents that kind of bargain. Buy FDX at $105 or less.

 

“General Electric (GE NYSE) is so far out of favor on Wall Street that you seldom hear the stock mentioned anymore in polite company. Quite a comedown from the late 1990s, when former Chairman Jack Welch was lionized on the tube as a pop hero, and the stock sold for 40 times forward earnings. Today, despite record profits, the world’s premier industrial conglomerate fetches only 16 times the next 12 months’ estimated net. In short, GE—the epitome of a blue chip growth stock—has been beaten down into a lowly value stock. Its dividend yield, now 3%, has shot up to the vicinity of an 11-year high. Buy GE at $35 or less. GE offers a low-cost, direct-purchase plan that allows you to buy stock (even if you’re not currently a shareholder) from the company, bypassing brokers. For literature, call 800/786-2543 or visit http://stockbny.com/ge.

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