Three Blue-Chip Stars Await Discovery

08/06/2007 12:00 am EST

Focus:

Richard Band

Editor, Profitable Investing

Richard Band, editor of Profitable Investing, finds three blue-chip stocks he thinks investors have overlooked but that he thinks will post strong gains in the months ahead.

Here are three stocks, becalmed at the moment, that pack tremendous value. All it would take to send these shares flying is a slight shift in the winds of investor sentiment.

American International Group (NYSE: AIG), the world’s largest insurer, has done a superb job of cleaning up after the accounting scandals that brought down the wrath of regulators a couple of years ago. AIG’s new management team is adopting a much more shareholder-friendly posture, too. In March, AIG announced an $8-billion stock buyback and declared that the company will sweeten its dividend 20% a year for the foreseeable future.

Recently, however, AIG has slipped back, The selling leaves us with a stock quoted at less than 11x this year’s estimated earnings—laughably cheap for a company that routinely traded at 15 to 20x earnings in the mid-1990s, before the bubble took hold. Current yield: 1.2%. Buy at $71 or less. (The stock closed below $62 Friday—Editor.)

Unless you’ve been on a Kon-Tiki cruise in the South Pacific, you’ve no doubt heard that News Corp.(NYSE: NWS-A) CEO Rupert Murdoch has sprung a $5-billion bid for Dow Jones, publisher of Barron’s,and The Wall Street Journal.

As with so many previous Murdoch ventures, like his purchase of MySpace.com, the DJ transaction has stirred harrumphs among the green-eyeshade set. How will he make it pay? I’m not privy to Murdoch’s spreadsheet, but I do know that DJ has been incompetently managed—more like National Public Radio than a profit-seeking business—for decades.  If anybody can wring dramatically improved results from Dow Jones, it’s the concrete-hearted Australian.

Two years ago, News Corp.’s stock sold for about 15x cash flow. Today, despite brisk growth in the business, you can buy a piece of Rupert’s empire for almost 20% less. Call Murdoch any name you want; his stock is a steal up to $23. (It closed Friday below $21—Editor.)

As the leading brand in one of the nation’s fastest-growing industries, Zimmer Holdings  (NYSE: ZMH) normally sells at a forward P/E well above 20x. (Only two years ago, the stock fetched 24x forward profits. It is now modestly valued at 20x estimated earnings for the next 12 months.)

Some time in the coming year, I suspect, the shares of this leading manufacturer of orthopedic devices will regain their traditional premium price tag. ZMH pays no dividend. However, the company energetically buys back its own stock—an indirect way of returning cash to shareholders. Shares outstanding have shrunk 4.4% in the past 12 months, giving the stock an implied dividend yield equal to that of many banks and utilities. Buy at $89 or less. (It closed just above $77 Friday—Editor.)

I’m projecting that this blue-chip trio will rack up a total return of 20%–30% in the next year—more if the bull market extends to late 2008 or early 2009.

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