Stocks That Can Outpace the Economy

06/12/2007 12:00 am EST

Focus:

Richard Band

Editor, Profitable Investing

Richard Band, editor of Richard E. Band’s Profitable Investing, finds three relatively inexpensive stocks he thinks can do better than the economy and the market.

At this stage of the market cycle, you want to be careful with your shopping. The key is to uncover outfits whose prospects are likely to improve faster than the general economy over the next few quarters.

Here are three well-known, financially solid names that fit the bill [and] are trading at
surprisingly modest prices, compared with their future earning power:

News Corp. (NYSE: NWS.A). Media mogul Rupert Murdoch’s $5-billion bid for Dow Jones & Co. (NYSE: DJ), parent of Barron’s and The Wall Street Journal, has stirred fears that Murdoch might overpay, damaging News Corp. shareholders. However, I consider these worries groundless. Murdoch has already stated publicly that his offer represents a “full and fair price” for DJ. Don’t look for the wily Australian to spark a bidding war against himself.

Meanwhile, News Corp. is enjoying robust growth through its ventures in movies and cable programming (Fox). Operating profits in the March quarter shot up 21% from a year ago. At only 16x estimated earnings for the fiscal year ending June 2008, this blue chip will treat you gently when the market gets rough—and give you a fast ride on the way up.

Buy the Class A (nonvoting) shares at $22 or less. (The stock closed slightly above $22 Monday—Editor.)

Target Corp. (NYSE: TGT). The US economy is slowing, [but] Wall Street is exaggerating the likely impact on consumer-oriented businesses, such as retailers. TGT stock has slipped almost 10% from its February high, even though 2007 earnings estimates for the company have held as steady as Gibraltar.

TGT is steadily gaining ground with its unique “cheap chic” marketing strategy. On the financial front, TGT’s shareholder-friendly management is actively buying back stock (and has doubled the dividend in the past four years). At less than 16x year-ahead earnings, the stock is poised to bounce smartly as soon as investors realize that the never-say-die American consumer is on the prowl again. Buy at $59 or less. (The shares closed just below $63 Monday—Editor.)

Toll Brothers (NYSE: TOL), [a] luxury homebuilder, has taken it on the chin as a result of the downturn in the national housing market. However, TOL has weathered the storm better than most builders, thanks to the company’s conservative balance sheet. What’s more, I’m convinced that the housing industry is bottoming out in many parts of the country and will slowly improve in the second half of the year.

TOL shares are holding well above last summer’s low. It was precisely this pattern—share prices holding firm despite terrible news headlines— that enabled me to call the historic bottom in Chrysler 25 years ago this summer. I’m expecting a similar upside reversal for Toll this time.

Buy TOL at $27.50 or less. (They closed at around $27.50 Monday—Editor.) I’m targeting a 30%-50% return over the next 18 months. Because TOL is volatile, you should limit your position to no more than 3% of your total portfolio.

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