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April 11, 2012, 12:01 a.m. EDT
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By Jonathan Burton, MarketWatch
NEW YORK (MarketWatch) "” Wall Street's wallflowers are value-stock buyers' pinups.
The U.S.'s long industrial decline might be in reverse. Photo: AP Photo/Gene J. Puskar
Chad Brand, president of investment manager Peridot Capital in Pittsburgh, Pa., favors unloved, underappreciated and unfashionable stocks, and is careful about most everything else in the market. His popular Peridot Capitalist blog highlights investments where Brand is putting money and areas that he would avoid.
"I'm a long-term, contrarian" investor, Brand said in a telephone interview last week, before the market's recent beating. "I'm always looking for things that are mispriced. I try to block out the noise, look at the big picture and be opportunistic."
Brand searches for well-known companies that are perceived as being past their prime but still offer growth, he said, pointing to Teva Pharmaceutical Industries Ltd. /quotes/zigman/64731/quotes/nls/teva TEVA +0.59% as an example.
Teva is a leading generic drug manufacturer, but a chunk of its revenue is hinged to a proprietary treatment for multiple sclerosis, Copaxone. Ironically, generic drug firms will be able to produce a version of Copaxone after its patent expires in a couple of years.
As a result, Brand said, Teva shares trade at a depressed valuation of about eight times earnings, which he's convinced is an overreaction. "Even companies that have taken a patent hit, like Merck and Pfizer, are trading at a 10 multiple," Brand said. Teva's growth rate will likely slow, he added, but it boasts a "powerful, profitable business that throws off cash."
Cellular communications provider NII Holdings Inc. /quotes/zigman/89571/quotes/nls/nihd NIHD +2.99% is in a similar situation, Brand said. The company operates across fast-growing Latin America and its subscriber base is expanding, Brand noted. The company is spending heavily to upgrade networks, which is cutting into earnings and weighing on the shares, but this is a temporary condition, he said. Once expenses normalize, Brand said, he expects NII Holdings shares to hit $30 from around $18 currently.
"The easy gains for the year have probably been made," Brand said. Accordingly, his portfolio is filled with defensive, dividend-oriented consumer companies.
Pharmacy chain Walgreen Co. /quotes/zigman/245520/quotes/nls/wag WAG +2.70% is a good example. The stock was hit recently after the company exited pharmacy benefits manager ExpressScripts Holding Co.'s network. Brand said he expects Walgreen shares to bounce back, with buyers attracted to the stock's dividend, at 2.8%, and attempting to profit from the demographics of an aging population.
Consumers are fickle about spending, particularly when it comes to food. Yet restaurant stocks have been satisfying investments, to the point where shares of well-known chains such as Chipotle Mexican Grill and Starbucks are market leaders "” and too richly priced for Brand's taste.
But Brand does like the restaurant business, so he's scooping up shares of smaller firms that are strong operators with loyal followings. Two favorites: Kona Grill Inc. /quotes/zigman/97050/quotes/nls/kona KONA +2.46% and Biglari Holdings Inc. /quotes/zigman/585892/quotes/nls/bh BH +0.05% , the parent of the Steak n Shake and Western Sizzlin chains.
"As a value guy, I'm not interested in a 30 or 40 p/e multiple, even if it is a good growth story," Brand said.
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