Inside Wall Street: Gabelli's 'Focus Five' Stocks Are Worth Watching

Beating the stock market is certainly an achievement, particularly in these volatile times. But beating the indexes consistently in each quarter for the past three years is just dynamite. And that's what highly regarded investor Mario Gabelli and his team of analysts have achieved.A deep-value investor who uses a concentrated formula rather than the more popular diversified-portfolio strategy, Gabelli and his crew every quarter pick and invest in five stocks. For the fourth quarter of 2009, their picks scored high against the market. Gabelli's "Focus Five" stock selection gained 9.09%, outscoring the S&P 500-stock index's 3.64% return. Since its inception on Jan. 31, 2006, the Focus Five has overwhelmed the S&P 500, chalking up a hefty 155.1% gain against the S&P's 11.5% loss.

Stocks in Gabelli's Focus Five picks for the fourth quarter were Constellation Brands (STZ), DirectTV (DTV), MasterCard (MA), Millicom International Cellular (MICC), and Safeway (SWY).

Looking for That Special Combination

What's Gabelli's secret formula? Actually, it's hardly a secret -- it simply entails hard research and savvy judgment. From the universe of stocks that the Gabelli analysts have researched, "we ascertain which stocks are trading at especially attractive multiples relative to their private market value," says Daniel Miller, vice president and head of institutional equities at Gabelli & Co. Miller heads the Focus Five group.

Combing through an initial selection of stocks plucked by the Gabelli analysts, "we then ascertain which of them have near-term identifiable catalysts that should help drive the stock up," he adds. One common thread among them: Each trades at a relative discount to its intrinsic worth.

What stocks have Gabelli chosen for the first quarter of 2010? They are:

Cablevision Systems (CVC), the fifth-largest cable-TV operator, whose assets include cable network networks AMC, IFC and Women's Entertainment. The company is in the process of spinning off its Madison Square Garden (MSG) unit. Its stock, now trading at $26 a share, is worth 35, according to some analysts.

Coca-Cola FEMSA (KOF), the largest Coca-Cola bottler in Latin America, which Miller says is well positioned to benefit from Coca-Cola's continued major focus on the region. Coke has committed to invest $11 billion in Mexico and Brazil over the next five years. One potential catalyst for the stock: Beer maker Heineken recently bought FEMSA's Cervesa beer, and Gabelli believes the Danish brewer may also want to buy the 14.7% of Coca-Cola FEMSA's shares outstanding that are still in public hands. Coca-Cola FEMSA, now at $61 a share, is down from its 52-week high of $67.55 on Dec. 28, 2009. It traded as low as $25 on Mar. 25, 2009.

Constellation Brands, a major global maker and marketer of wine, beer and distilled spirits, currently trading at $16 a share. Miller figures the company's wine and spirits businesses alone are worth more than the current price of the stock. He says the stock doesn't yet reflect the value of Constellation's 50% stake in Crown Imports, a leading U.S. beer importer.

ITT Educational Services (ESI), one of the largest post-secondary education providers, mainly offering technology-oriented degree programs to help students develop skills for career opportunities. The company owns and operates 105 ITT Technical Institutes and Daniel Webster Colleges that serve about 70,000 students in their campuses in 38 states and online. ITT will benefit from the Obama administration's goal of increasing college enrollment and focus on creating jobs, says Miller. And with projected yearly EBITDA growth of 20% and earnings growth of 24% through 2013, he says the stock is attractive and undervalued. Trading at $95 a share, it's down from a high of $133 in early January 2009.

MasterCard
, which continues to be a major global brand. As the consumer spending recovers worldwide, says Miller, MasterCard's international business (accounting for more than 50% of total revenues) should contribute earnings growth of more than 20% a year. Now trading at $253 a share, the stock is still undervalued, Miller figures.

Standard & Poor's analyst Stuart Plesser, who rates the stock a buy, figures it's worth $280 based on 21 times his estimated 2010 earnings of $12.95 a share. "There are plenty of opportunities for MasterCard to generate strong growth in the longer term, including international expansion, debit card growth and prepaid cards," says Plesser. And he expects transaction volume to remain solid as consumers shift to greater credit usage.

If the history of robust performance by Gabelli's team continues to repeat, investors may find it convenient enough to simply follow their lead by investing in the Focus Five stocks.

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