Hidden Gems: Analyst's Stock Picks


Alex Vallecillo is co-manager of the Allegiant Mid Cap Value Fund and on "Morning Call" he gave his picks for our "Hidden Gems" segment (he's a five-star fund manager). Vallecillo listed these stocks as his picks and the reasons why he likes them (two of them are exclusives for cnbc.com readers).

Spirit Aerosystems Holdings Inc . This company is positioned to grow materially from increased Boeing jet deliveries over the coming years. And it's trading at 16 times '07 EPS estimates of $1.84. It has a $4 billion market cap.

Perot Systems Corp. This is a well-managed IT services company with great defensive characteristics and has a strong balance sheet. It focuses on healthcare and government industries--benefiting from smaller size and the ability to grow from smaller and less competitive contracts. Perot Systems has a $1.9 billion market cap and trading at 17 times '07 estimated EPS of $0.93.

Hidden Gems

Health Management Associates. This company is an operator of 62 acute care hospitals located primarily in rural markets. It has the potential for improved earnings from better debt management. It has a $5.0 billion market cap and is trading at 15 times '07 EPS estimates of $1.35.

Dollar General Corp. Revenues have been healthy for this company--that operates some 8,3000 discount stores. But margins have been hurt by bloated inventories and poor merchandising. There is a potential for recovery from announced initiatives to improve earnings performance. It has a $4.9 billion market cap.

Vallecillo listed the following stocks on cnbc.com--exclusively.

Southwest Airlines. Despite being well-managed, this stock has underperformed for five years despite a good earnings track record. That should mean improved valuation (the worth of the stock). With industry consolidation and "moderating" fuel prices--Southwest should be in position for further earnings growth.

Smithfield Foods. This company's largest product is pork--but also has beef and prepared food operations. The stock has recently underperformed for two reasons: feed prices have gone up (squeezing margins) and the company is in the middle of several acquisitions they are trying to integrate. But--in time they should "digest" what they've acquired and the long-term prospects look good. The company does have a long history of growth through acquisitions.

Analyst disclosure: Vallecillo owns the fund he manages--which has all the stocks mentioned above. He does not own them individually.