Inside Wall Street: 3 stocks with big upside
Tyco, CIT Group and Inventure Foods are among the best ideas to beat a rising market.
Beating the resolutely rising market this year won’t be an easy task, but some stocks are still apt to help investors capture at least a part of the advance. Adroit stock picking skills are, of course, the answer which some experienced and savvy investment managers have put to good use in this market.
What's important now, these pros argue, is to find stocks that have had a relatively good run because of fundamental and technical factors but at the same time still face the prospect of more improvement on potentially positive developments ahead.
"We still find some stocks in various industries that trade at a significant discount to their private market value, and also benefit from near-term catalysts," says Dan Miller, portfolio manager at Gabelli & Co. After publishing Gabelli's Best Ideas report for six years with ample success, Miller launched the Gabelli Focus Five strategy on Jan. 12, which also produced enviable results.
In just over eight months, assets under its management of $5 million leaped to $30 million, with the Focus Five Fund up nearly 19% year-to-date. The Focus Five Fund is a multi-cap portfolio of 25 to 35 stocks which, Miller says, highlights stocks still trading below their intrinsic worth.
Among Miller’s latest picks are three diverse special-situation stocks that he expects will achieve higher price levels largely because of catalysts over the short haul.
- Tyco (TYC), a global conglomerate that has announced plans to split into three publicly traded companies, which closed Tuesday at $54.40 a share
- CIT Group (CIT), a regional bank that provides commercial financing and management advisory services to clients in a variety of industries, which closed at $39.71 a share
- Inventure Foods (SNAK), which makes salty snacks sold primarily through retail grocery chains, which closed at $5.99 a share
Miller says the restructuring plan of Tyco, with a market capitalization of $25 billion, will generate increased returns to shareholders as the three units that would trade independently will be able to demonstrate their true value and attract not only more investors but larger companies that may end up acquiring each of them.
The three units are ADT North America Residential, a provider of residential and business security systems in the U.S. and Canada, serving more than six million homes and companies, which is expected to produce revenue of $3 billion this year; Flow Control, which makes pipes and valves, with revenue of about $4 billion (In March 2012, Tyco agreed to merge the unit with Pentair (PNR), in which Tyco holders will get a 52.5% stake in the combined company); and Tyco Commercial and Fire Security, with about $10 billion in annual revenue.
Miller expects the commercial security and fire protection unit will attract suitors, one of which he speculates would include the French conglomerate Schneider.
He figures that based on a sum-of-the-parts valuation, Tyco is way undervalued. At its current price of $54 a share, analysts expect the stock will exceed its 52-week high of $58 this year. The reward of owning Tyco’s stock now is the prospect of a much higher value for its parts after they start trading independently.
CIT Group, which has been among the strong performers among regional banks this year, is undergoing a major transformation, says Miller. Now under the leadership of its new CEO, John Thain, the ex-chief executive of Merrill Lynch before it was acquired by Bank of America (BAC), CIT has redeemed a significant part of its high-cost debt, in part due to its profitable online banking operations.
The catalyst at CIT, says Miller, is Wall Street’s expectation that the Federal Reserve will allow it to return to shareholders a portion of its $2.5 billion excess capital in the form of either buybacks or dividends. At its current price of $40 a share, the stock isn’t too far from its high of $49.57 hit in January 2011. Speculation that CIT will finally be able to repurchase shares or pay a dividend has been fueling the stock’s upward drive. Analysts expect the stock to hit at least $50 when that happens.
Inventure is probably the most interesting among Miller’s stock picks as it is not widely followed or well known among investors -- and is a likely takeover candidate. Apart from the takeover angle, the company should benefit from the continued trend towards health and wellness among consumers, says Miller. The company makes healthy, natural specialty snack food items, including those under license from T.G.I. Friday’s and Burger King restaurants.
Given its unique footprint and distribution system in snack foods, "Inventure represents an opportunity for a larger competitor to add it to its portfolio," says Miller. In other words, Inventure is an enticing potential takeover target. "A deal at $9 a share could still be accretive to earnings for potential acquirers," Miller figures. Inventure is currently trading at $6, down from its 52-week high of $7.54 reached on July 23.
The bottom line: Tyco, CIT Group, and Inventure Foods are among the diverse type of investment bets that could reward investors handsomely in this rising yet volatile stock market.
Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
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