The Two Best Value Bets for 2011

01/06/2011 11:07 am EST

Focus: STOCKS

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

An insurer with strong Asian growth prospects and a slimmed down technology distributor are too cheap to ignore, writes J. Royden Ward, editor of Cabot Benjamin Graham Value Letter.

I believe Arrow Electronics (NYSE: ARW) and Prudential Financial (NYSE: PRU) will rack up big gains for you in 2011. Both stocks easily qualify as Benjamin Graham undervalued stocks with low price-to-earnings and low price-to-book-value ratios.

On the Straight and Narrow
Arrow Electronics, founded in 1935 and based in Melville, NY, is the second largest distributor of electronic components and computer products. Recent restructuring efforts have reduced costs and increased profitability.

Revenues increased 21% and earnings per share soared 113% during the 12 months through September. Stronger growth in Asia, astute acquisitions, and lower costs contributed to the exceptional results. Total sales will increase by a minimum of 10% and earnings per share will increase 25% during the next 12-month period. Growth could exceed our estimates if the economy picks up and acquisition costs diminish. The purchase of Nu Horizons Electronics will add to earnings in 2011 and provide faster growth in Asia.

Shares are undervalued at 1.02 times book value and 9.7 times latest 12-month earnings per share. The company has not paid a dividend since 1986, but we believe dividends could be reinstated within the next couple of years. ARW's balance sheet is strong with plenty of cash to fund future expansion. Arrow is a medium risk, but presents a rare opportunity to buy an underpriced value stock with rapidly growing earnings.

A Rock-Solid Insurer
Prudential Financial, founded way back in 1875 with headquarters in Newark, N.J, is one of the largest financial services companies in the US. The company provides a wide range of insurance, investment management and other financial products and services. The Prudential name and "Rock" logo are among the most widely recognized in the US and abroad. The company is currently focusing on the Japanese and Korean markets as well as retirement-oriented financial products in the US.

Revenues increased 11% and earnings per share soared 150% during the 12 months through September. Stronger growth in Japan and increased demand for annuities in the US contributed to Prudential's outstanding results. Sales will likely increase by 5% and earnings per share should increase 8% during the next 12-month period. Prudential will purchase Star Life and Edison Life from American International Group (NYSE: AIG) during the first quarter of 2011. The acquisition will add significant revenues in 2011 and provide rapid earnings growth in 2012 derived from the rapidly growing insurance markets in Japan.

Prudential shares are clearly undervalued at 0.76 times book value and 9.1 times latest 12-month earnings per share. Strong demand in Japan coupled with the two acquisitions will enable Prudential to expand rapidly during the next several years. The recently increased dividend, paid annually, provides a yield of 2%. Prudential is medium risk. The company's leading position, wide array of financial products and services and global reach offer an investment opportunity too good to pass up.

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