Five Second Place Companies That Are Number One For Investors

One of the few bits of investing conventional wisdom that nearly everyone accepts is that people should always look out for number one.  The problem with following that advice is investors may miss out on some compelling values from upstart companies eager to take away the leadership position from the incumbent.

Figuring out when to look out for number one is never easy.  Among the questions investors need to ask is what the top dog is doing to stay ahead of the pack?  Is it buying growth through acquisitions or sacrificing margins to gain revenue?  There is no talent required to buy growth or give away the store.

24/7 Wall St.  has decided to examine six “duopolies” where there is a clear indication of who is number one and who is number two.   We reviewed a number of factors including EPS growth, price-to-earnings ratio and stock price performance.  Our analysis is below.

Apple Inc. (AAPL) vs Research in Motion (RIMM) — Comparing these two tech bellwethers is almost like choosing between a Porsche (Apple) and a Buick (RIM).   Apple’s devices are studies in elegance while RIM’s are testaments practicality.    Of course, Apple was first to market with the iPad, which sold 2 million in less than 60 days.  RIM’s tablet, the Playbook, came out last month, and has received some positive reviews.   The Canadian company’s BlackBerry continues to be the cell phone of choice for business.  When it comes to the stocks, there is no comparison.  Apple, whose shares have soared more than 50 percent this year, trades at a price-to-earnings ratio of 20.99.  Research In Motion trades at a p/e ratio of 9.33. Its shares are down more than 28 percent.  Yesterday, Apple reported a 70 percent jump in fourth quarter results, beating analysts’ forecasts.  Shares fell because iPad sales were disappointing and the company’s guidance was disappointing.

Verdict: RIMM. Despite Apple’s sell-off, the valuation of Research In Motion is too compelling.  Sales at the Canadian company are expected to grow more than 32 percent this year.

Wal-Mart (WMT) vs. Target (TGT) —  In the latest chapter of the retail wars,  victory has gone to Target Corp.  Shares of the number two retail chain have bested Wal-Mart, gaining 11 percent this year, versus 0.73 percent for the larger rival. Both stocks are trading near their 52-week highs.   Wal-Mart is slightly cheaper with  forward p/e ratio of 12.79 versus a comparable figure of 13.16 for Target.  The Minnesota company’s one year EPS growth is forecasted at 18 percent versus  9.6 percent growth for Wal-Mart.

Verdict: Target.  When the economy rebounds, scared shoppers who fled Target for Wal-Mart will return.  Always go with growth.

Procter & Gamble (PG) vs.  Unilever (UL) — Wall Street has clearly taken a shine to Procter & Gamble compared to its European rival, sending its shares up 4.57 percent versus a decline of 8.92 percent for Unilever. The parent of Ben & Jerry’s, however, may be a better buy.  It trades at a ratio of 21.35 versus 17.97 for  P&G.  Growth prospects are better at the European company as well.  Analysts expect revenue to grow 9.7 percent this year versus 3.3 percent at the American company.

Verdict: Unliver. The tide is turning in Unilever’s favor.

General Electric (GE)  vs.  United Technologies (UTX) — United Technologies Corp. is the Connecticut conglomerate Wall Street likes.  The maker of Otis elevators and Sikorsky helicopters lacks the flashy businesses of its neighbor, such as finance and entertainment.  Analysts expect the company’s revenue to increase this year and for GE’s to fall.  On a p/e basis, United Technologies is valued at 16.87. versus 15.16 for GE.  The valuation reflects the concern that many things can go wrong for GE such as the Comcast  (CMCSA) deal, while many things can go right for United Technologies.

Verdict: UTX.

Google (GOOG) vs.  Yahoo!  (YHOO) — If these were widget companies of equal stature,  Google would still be the better stock.  Google trades at a p/e of 25 versus Yahoo at 26.  The search engine company is expected to increase revenue by 21 percent this year versus a decline of about 1 percent for Yahoo!.  Shares of Google have barely budged this year while Yahoo! is off more than 5 percent.  Google is growing, albeit at a slower pace than in earlier years.  Yahoo! continues to rely on cost cutting to bolster its bottom line.

Verdict: Google.

Walt Disney (DIS) Vs. News Corp (NWS) — The House of Mouse has squeaked a 7.69 percent gain this year, compared with the 0.57 percent increase by the House of Murdoch.   This underscores News Corp’s long-standing suspicion that the company is not run for the benefit of anyone not related to the CEO.  New York-based News Corp trades at a trailing p/e ratio of 14.52, cheaper than the 16.74 level of Disney.  On a forward p/e basis, the picture is the same with News Corp at a ratio of 12.72 and  Disney at a ratio of 15.25   Analysts expect EPS at the parent of the ABC TV network to jump 14.8% this year while News Corp., which owns Fox News Channel,  is due to rise 20%.

Verdict: News Corp . The World Series ratings should be solid and viewers will continue to check out “American Idol” even without Simon Cowell.  Plus, having Republicans gain control of Congress will benefit Fox News Channel.

–Jonathan Berr (Berr owns a small stake in Disney).