Out-of-Favor Favorites

01/20/2006 12:00 am EST

Focus:

With 30+ years of investment experience, few advisors are as respected by investors and professional peers as John Dessauer. Noted for his independent thinking, his favorite stocksincluding his top picks for 2006are often ones that are misunderstood by Wall Street.

"Cendant (CD NYSE), my conservative pick for 2006, will become four stocks before 2006 is over. The company will spin out its four divisions to us (in a tax-free transaction) this year, starting with 'Real Estate' services this spring. The 'Housing' stock hasn’t been spun out yet, but Wall Street is already knocking this part of Cendant because of the 'housing bubble' fantasy. They know there won’t be a refinancing boom, interest rates won’t be falling fast, and house price growth will slow. What they don’t see is that those trends are healthy for a normal housing market.

"Then, this summer, investors in Cendant will receive shares in its 'Hospitality' business, including the vacation timeshare business. It may take a couple of quarters before the travel business grows, but shares in this unit should do well too. The hotel business is booming and the timeshare segment is growing fast. I expect the shares in this unit to do very well post-spinoff. We will receive shares in 'Travel Distribution' in October. The final Cendant business will be Rental Cars.

"CD was bashed last month after management announced a problem with the Travel Distribution business. Part of the problem is management, and one high-level head has rolled. Part of the problem is technical and the Web site traffic has been too much for the infrastructure to handle. Management is addressing these issues, but online travel is a growth business. Gloomy analysts say CD is worth $20 to $22, for a 20% gain this year. But I think the package, once spun out, could be worth much more than $20, perhaps even $30 a share.

"My favorite speculation for the year ahead is Rite Aid (RAD NYSE), the third largest drugstore chain in the country. This stock is a turnaround situation. Following an accounting scandal that occurred several years ago, the company is now under new management. Meanwhile, the company showed progress in its third fiscal quarter operations, although I am one of the few analysts that see things that way.

"Most analysts are still skeptical and worry that a real turnaround is far off. Goldman Sachs apparently sees the stock as a trading vehicle, to buy around $3.50 and sell above $4.00. I believe many others see the stock the same way. However, if I am right and the basics are in place for a real turn for the better, this should be the year when that value becomes clear and a low trading range gives way to a long upward move, to over $5 this year and more later."

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