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Top 10 Picks for Value Hunters: Portfolio Manager

Robert Holmes|Senior Writer
Monday, 1 Aug 2011 | 3:12 PM ET

Investors initially cheered the news of a debt deal Monday after six consecutive losing sessions that lopped 4 percent off of the S&P 500, but many were quick to sell into the market lift.

Some value investors, on the other hand, continue to look for attractive long-term opportunities in any exaggerated moves to the downside for quality companies that may result from increased investor uncertainty and fear.

Jason Clark, portfolio manager at value-investment firm Al Frank Asset Management in Aliso Viejo, Calif., added to his favorite companiesm as well as new positions, as the markets have tumbled. With a long-term orientation and a contrarian investment approach, Clark is using uncertainty from the debt-limit debate in Washington to his advantage.

Clark and his firm view as solid value picks Wal-Mart , Disney , Chesapeake Oil and Cooper Tire & Rubber , among others.

Clark says he and his firm are pleased to see some level of progress occur in Washington, after President Obama announced Sunday that the White House and Republican congressional leaders had reached an agreement on raising the government's debt ceiling and cutting spending.

The official voting is expected later Monday by the House and Senate, which would avoid a technical default, but Clark says there is a lot of work yet to be done by the country's leadership for the nation's long-term financial structure.

"There is still going to be some near-term investor concern about a potential debt downgrade," Clark says. "Eyes will undoubtedly begin to focus on the economy and the amount of data that will be released this week."

This uncertainty breeds opportunity for value investors. Clark says his firm usually invests all its money, but lately he's kept higher levels of cash as the stock market climbed throughout the year. "Historically, we've maxed out at 2 percent cash. Now, we're between 4 percent and 7 percent, which is low but still a lot more than usual," Clark says. "We've got the dry powder."

Designed for long-term-oriented investors, the Al Frank Fund has total assets of about $104 million and more than 110 stock holdings. Most of the fund was devoted to electronic technology and finance as of June 30. Some of the fund's top holdings are Marathon Oil , McKesson and Norfolk Southern , according to the latest fact sheet.

Since it was started in January 1998, the Al Frank Fund has had an annualized return of about 10.2 percent, beating the 4.6 percent gain of the Russell 3000, which the fund uses as a barometer of the broad stock market.

With the markets in flux, European debt woes continuing and plenty of uncertainty regarding the U.S. debt limit and a possible downgrade of the coveted triple-A rating by credit-ratings agencies, Al Frank Asset Management's value approach with expansive diversification is an investment strategy for investors unsure of which direction to take. Clark says now the focus has turned to dividend-paying stocks.

"We are a bottoms-up investment shop, but we do have a top-down overlay," Clark says. "With the uncertainty in Washington, you're seeing people already looking at dividend payers. There could be additional demand for them, especially with what we're seeing with yields in the bond market, fixed-income market and money markets."

Clark offers 10 stocks that Al Frank Asset Management views as good value stock picks currently, arranged in order of potential upside based on the firm's target prices. Here are his selections.

DTE Energy
Company Profile: DTE Energy is the parent company of three Michigan-based regulated utilities and four non-regulated subsidiaries.
AFAM's Target Price: $64.05
Potential Upside From Current Levels: 27 percent

Clark's Take: Michigan continues to experience tough economic times, but Clark believes the state's struggles are slowly subsiding. As regional economic activity stabilizes and capital expenditures level off, Clark and his firm expect that DTE's management will have the opportunity for periodic dividend increases over the next several years. DTE shares currently have a dividend yield of about 4.7%.

"We like DTE's attractive earnings growth profile and the overall constructive regulatory framework in its home state," Clark says. "The 4.7% dividend yield compares favorably to that of its regulated utility peer group, which yields an average of 4.2%."

Wal-Mart Stores
Company Profile: Wal-Mart is the world's largest retail chain.
AFAM's Target Price: $76.12
Potential Upside From Current Levels: 44 percent

Clark's Take: Wal-Mart is a U.S.-based company, but with an international presence in Argentina, Brazil, China, Japan, Mexico, and South Africa, among other locations, Clark says the company has attractive long-term growth opportunities.

"That said, shares have been sluggish as investors have been focused on the missteps that occurred on the domestic side over the last couple of years," Clark says. "We are encouraged by management's strategy to return to 'the glory days' in the U.S., anchored by efforts to aggressively re-emphasize 'Every Day Low Prices,' increase product offerings, and improve the price-match guarantee program.

Clark also notes Wal-Mart's attractive valuation. The stock trades at less than 12 times forward earnings estimates and carries a price-to-sales ratio of 0.44, both 40 percent below the 10-year averages. The stock also offers investors a 2.8 percent dividend yield.

Chesapeake Energy
Company Profile: Chesapeake is an independent exploration and production company with a focus on U.S. onshore natural gas production.
AFAM's Target Price: $51.31
Potential Upside From Current Levels: 50 percent

Clark's Take: Chesapeake has historically bought properties in shale gas fields and partnered with other to share development costs. But as oil has strengthened and gas fundamentals have weakened, Chesapeake has moved to higher-margin liquids.

"Recently updated strategic plans call for a two-year overall production growth target of 25 percent along with debt reduction of 25 percent," Clark says. "Strong volume growth and good drilling prospects should allow the company to leverage its many joint ventures and capitalize on the numerous acquisitions made over the years. An aggressive hedging strategy partly offsets the inherent volatility of the business and provides cash flow protection, which supports the 1 percent dividend yield."

Walt Disney
Company Profile: Disney is a media conglomerate best known as the home to Mickey Mouse. The company has key operations in television, theme parks, filmed entertainment and merchandise licensing.
AFAM's Target Price: $60.01
Potential Upside From Current Levels: 54 Percent

Clark's Take: Disney's move to bring content across digital platforms, like Apple's iPhone and iPad, has made the stock very attractive, Clark says. The firm counts Disney as a core holding in a portfolio as a representative of the consumer discretionary space.

"As a content-oriented company, Disney's top strategic priorities include creativity and innovation, international expansion, and leveraging new technology applications," Clark says. "Along with steady affiliate fee growth and improved theme park metrics, we expect strong growth from new franchise films (e.g., 'Cars 2'), further leveraging of the Marvel franchise and robust international demand. Given Disney's size and financial strength, we would also expect to see additional acquisitions in the years ahead."

DDi Corp.
Company Profile: DDi designs, engineers and manufactures printed circuit boards, or PCBs.
AFAM's Target Price: $14.30
Potential Upside From Current Levels: 77%

Clark's Take: Clark notes that while DDi has a customer base of more than 1,000 electronics companies, growth within DDi's U.S. military segment deserves a closer focus as military equipment makers need PCB work to be done onshore.

"We like that the company has been consistently profitable and has a solid balance sheet that sports over $1 per share of cash," Clark says. "This micro-cap tech name generates solid free cash flow which supports an attractive dividend yield of 4.9 percent. Shares trade with a forward earnings multiple of less than eight and an enterprise value-to-EBITDA multiple of six, almost 30 percent below its five-year average."

See Clark's remaining five value picks here.

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CNBC Data Pages:

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Disclosures:

Disclosure information was not available for Chuck Gabriel or his company.

Disclaimer

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CHK
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CTB
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DIS
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DTE
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MCK
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MRO
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NSC
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AL FRANK I
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WMT
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AAPL
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