Weeks before the Dow plummeted 512 points on Aug. 31, investment manager Bill Priest was already well on the way to completely bailing out of what he calls "elite super stocks" such as Coca-Cola, Gillette, and Aetna. "We've been cautious for some time, but mainly toward the S&P 500's top 50 blue chips," says Priest, CEO of BEA Associates, a unit of Credit Suisse Asset Management, which manages some $36 billion.
So where is Priest putting the cash from the sale of the mega stocks? Into the mid to lower tier of the S&P 500, stocks with market caps of $1.5 billion to $20 billion. His top three choices: AMR (AMR), parent of American Airlines; COMSAT, (CQ), a major provider of satellite and technology services; and Gannett (GCI), a leading newspaper publisher that also owns TV and radio stations.
BEA measures a company's value, in part, by how much excess cash flow is available--after deducting the cost of keeping up with capital expenses from operating earnings and debt--to pursue plans to maximize shareholder value, such as stock buybacks and acquisitions. Shares of AMR, COMSAT, and Gannett are all undervalued based on this method, says Priest.
AMR, which traded as high as 89 a share in mid-July, is down to 55, in part due to worries over Asia. But AMR isn't significantly dependent on the Asian market, and its European business is thriving. Trading at about 5 times operating earnings, "the stock is really cheap," says Priest, based on its growth rate. He expects AMR, which has dipped to 52 3/16 on Sept. 2, to hit 90 in a year.
COMSAT, a provider of satellite capacity to U.S.-based telecoms, will benefit from the rapidly growing long-distance market worldwide, notes Priest. Its clients include AT&T, MCI, and Sprint. The stock, which tumbled to 26 on Aug. 31 from 42 in late April, should climb to the mid-40s, he says. On Sept. 2, the stock rallied to 29 3/4.
Gannett should be another winner, argues Priest, because of its predictable, stable earnings growth. Shares of the publisher of 88 daily newspapers, including USA Today, should rebound to the 75-80 level, predicts Priest, from its current price of 57 15/16; it was 75 in early April.