4 Picks for Tortoises and Hares

03/15/2011 11:16 am EST

Focus: STOCKS

Paul Larson

Editor, Morningstar StockInvestor

If you believe slow and steady wins the stock race, you’ll like these cheap-and-growing drugmakers. Or if you act and react quickly with your portfolio, here’s an MLP that’ll interest you. In an exclusive interview with MoneyShow.com, Paul Larson, editor of Morningstar StockInvestor, explains why.

I know at Morningstar, you manage two portfolios, the Tortoise and the Hare. Any bargains left and what are you doing?

Sure. On the Tortoise side, two stocks I really like right now are both in the healthcare space, because they're just darn cheap.

Those are Pfizer (NYSE: PFE) and Abbott Laboratories (NYSE: ABT). Maybe I'll take those in order.

Pfizer is a stock where everyone's worried about the Lipitor patent expiring later in 2011. But there's much more to Pfizer than just Lipitor.

If you look to 2012—which will be the first full year after the Lipitor is gone from Pfizer—the company should earn somewhere north of $2 a share, by our estimates as well as the guidance of the company.

The stock is trading at $19 or thereabouts, so you're looking at a company that's trading at roughly nine times earnings once you're past this one negative event. That just seems way too cheap a price for that stock.

Looking at Abbott, it's in a very similar situation in that they have one blockbuster drug, Humira, and people are thinking that Abbott today is going to be like Pfizer was a couple years ago where they're just dependent on this one blockbuster.

Abbott is also just trading at a very cheap price. They should earn somewhere just below $5 a share, and the stock is in the mid 40s. So again you're looking at a stock trading at about nine times earnings.

Or, if you want to strip away Humira and just assume that that falls off the planet a year from now, you're looking at a stock that's trading ex-Humira at about twelve times [earnings], which is still—even if that drug was gone—a very low price for a company of Abbott's quality.

How about for the Hare portfolio?

Sure, one stock that I bought recently is a company called Energy Transfer Equity (NYSE: ETE). This is a master limited partnership primarily involved in natural-gas processing as well as pipelines.

The story here is that we have a very nice distribution, yielding right around 5.5%, and we think that distribution is going to grow at a double-digit rate for several years into the future, because they have two $1 billion-plus pipelines that are in the process of coming on-line right now.

These two pipelines should grow even by about 20% once they come on line. The combination of that increased EBITDA, as well as lower capital spending because they won't have these billion dollar projects that they have to put capital toward, is going to drive distribution growth at quite handsome rates.

Any other recommendations?

Sure, one that I happen to like a lot is St. Joe (NYSE: JOE).

This is a battleground stock between short sellers, led by David Einhorn, and institutional investors led by Bruce Berkowitz—who recently inserted himself on the board at St. Joe.

At today's price, the stock is implying the per-acre value of the company's massive Florida real estate of about $4,000 an acre—which I think is entirely too cheap, given the location of the land, as well as the fact that past is not prologue in the Florida real estate market.

We should look at a more normalizing trend in real estate in Florida in the years ahead.

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