Finding Unloved, Overlooked Bargains

07/17/2007 12:00 am EST

Focus:

Richard Band

Editor, Profitable Investing

Richard Band, editor of Profitable Investing, tries to find what’s increasingly rare in today’s markets—relatively cheap, quality stocks that have escaped Wall Street’s attention.

For safety and maximum appreciation potential, you’ll want to concentrate your money on names that are temporarily out of the Wall Street spotlight. Overlooked, underloved, bargain-priced stocks will give you the best chance to beat the market indexes. Two of my favorites are:

Last year, South African miner Gold Fields (NYSE: GFI) bought out its partner, Canada’s Barrick Gold (NYSE: ABX), in the South Deep property [in South Africa], which boasts the world’s largest gold deposit. As part of the purchase price, GFI issued $325 million worth of stock. Since then, Barrick has been selling the stock in the open market, depressing GFI’s share price.

A few weeks ago, however, GFI announced that Barrick had reduced its shareholding in Gold Fields by 75%. Thus, the “overhang” from the large Barrick stake has largely vanished. What’s left is an extremely cheap, high-quality gold stock (GFI is the world’s fourth-largest producer of the metal), trading at only 13x estimated earnings for the next 12 months.

I see little on the horizon to suggest a breakdown soon, and renewed concerns about the weak US dollar could trigger another rush into gold later this year. Buy GFI at $18 or less. (It closed near $17.50 Monday.) The stock carries a 1.5% dividend yield.

The nation’s fourth-largest bank, North Carolina-based Wachovia (NYSE: WB) holds a cherished slot in our Incredible Dividend Machine. In the past year, CEO Ken Thompson has launched an acquisition spree, gobbling up California mortgage lender Golden West and, now, retail stockbroker A.G. Edwards (NYSE: AGE).

Wall Street reflexively shies away from banks that engage in a lot of takeover activity, fearing that the deals won’t pay off. I understand the worry, but I think it’s misplaced in the case of Wachovia. WB’s biggest acquisition ever, of First Union Corp. in 2001, has proved to be a rousing success: WB shares have comfortably outperformed the average bank stock over the past six years. WB’s long-term growth rate is intact and I expect that the two latest deals will even enhance it.

And that dividend, wow! Currently, WB yields 4.1%, more than double [that of] the Standard & Poor’s 500 index. Furthermore, the company has fattened its dividend checks by 133% in the past five years alone.

Watch for another generous hike (well above the cost of living) in August. This is the type of outfit that can grow fast enough to shake off the effects of higher interest rates—or any other hindrance Mr. Market may throw up—for years to come.

Buy WB at $57.10 or less. (It closed above $52 Monday—Editor.)  I’m projecting a total return, including reinvested dividends, of 50%–70% over the next three years.

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