Big Changes For Gabelli's Focus Five Stock Picks (CCJ, DAN, SWX, XXIA, XYL, YHOO)

Each quarter comes a report from Gabelli & Co. for its FOCUS FIVE list of equity picks for the quarter ahead.  Since inception at the end of January 2006, the FOCUS FIVE is said to be up over 200% versus about 4.5% for the S&P 500 Index.  More importantly, the last list rose almost 5.7% from August 2 to October 31 against a drop of 3.02% for the S&P measured by Gabelli.

The current picks are Cameco Corporation (NYSE: CCJ), Dana Holding Corporation (NYSE: DAN), Southwest Gas Corporation (NYSE: SWX), Ixia (NASDAQ: XXIA), and Xylem Inc. (NYSE: XYL).  Yahoo! Inc. (NASDAQ: YHOO) is not on the list after it was removed as the only repeat stock of the prior quarter on the list.  We would note that Gabelli is generally much higher than the consensus analyst targets from Thomson Reuters and Gabelli’s FOCUS FIVE upside targets range from gains of 34.5% to as much as 63%.

In the FOCUS FIVE list, Gabelli often looks for what would be considered special situations, or undervalued opportunities based upon not-yet finalized information.  Some are very speculative in nature, while some are not so speculative.  In most cases, many investors follow the Gabelli team because they are often looking for mergers and acquisitions or some other special situation that the market may still be discounting.

We have included price information, a summary of the call, shown the 2011 earnings estimates, and shown the Gabelli “private market value.”  We also gave upside price targets comparisons for the Gabelli target versus a Thomson Reuters consensus price objective target as well as what the “PMV” has for upside. 

Cameco Corporation (NYSE: CCJ) is at $21.43 and Gabelli wants to know if China will restart its nuclear efforts.  The uranium producer is said to be on track to double its uranium production to 40mm pounds by 2018.  A focus on China is here because it may restart issuing new nuclear reactor licenses after having suspended them in the wake of the Fukushima, Japan incident. 

Gabelli believes that China will likely start giving out new licenses in late 2011 to early 2012.  Gabelli sees $1.20 EPS in 2011 and has a private market value of $35.00 for Cameco.  As this is a higher-risk scenario, Gabelli’s implied upside is over 63%.

Dana Holding Corporation (NYSE: DAN) is at $14.14 and Gabelli noted the recent quarterly earnings showed sequential improvement in the Commercial Driveline segment with 60bps of sequential margin expansion, despite commodity headwinds. Gabelli also noted 12% EBITDA margin within the segment.  Another focus was Dana’s “optimal position to benefit from a global light and commercial vehicle growth” and it concluded that management has a strategy to “continue improving internal operations and enhancing margins.” 

The Gabelli private market value is $23.00 for Dana, a bit higher than the $21.31 consensus target provided by Thomson Reuters. If Gabelli’s target gets hit then there is 58.5% upside in Dana.

Southwest Gas Corporation (NYSE: SWX) is at $39.48 and Gabelli has an eye on this one ahead of a pending settlement in Arizona.  It was called “a high-quality gas utility with a solid earnings outlook and low-risk strategy with potential for above-average dividend hikes as it considers moving to more industry-norm payout ratio of 60%, from the 48%…” That would be a substantial move for dividend lovers and would likely lead to higher dividend increases in the next few years.  The company has a pending rate increase request in Arizona where over half of its customer base is. 

Gabelli sees earnings of $2.20 EPS, $2.50 EPS and $2.60 EPS in 2011, 2012, 2013 respectively.   The private market value was put at $62.00 by Gabelli, well above the consensus Thomson Reuters target of $38.50 for the stock.  If Gabelli’s target gets hit there is almost 57% upside.

Ixia (NASDAQ: XXIA) is the next generation wireless pick by Gabelli.  At $11.33 today, its communication infrastructure is attractively valued relative to other companies in the test equipment market. There are several growth drivers: 4G/Long Term Evaluation (LTE), converged IP, and 10/40/100 GB Ethernet Speed.  More network expansion, network updates, and next generation network implementations across wireless, wireline, and converged data centers all remain drivers as well. 

Gabelli expects 2011 revenue, EBITDA, and non-GAAP EPS of $306 million, $56 million, and $0.50 EPS, respectively, and have a five-year annual revenue growth rate of 12.6%. Gabelli’s private market value of $17.00 compares to the Thomson Reuters consensus target of $12.25. If Gabelli’s target gets hit there is 50% upside in Ixia.

Xylem Inc. (NYSE: XYL) is at $26.74 and it is the spin-out of ITT’s water unit.  The interest will eventually be high on this after the dust settles, but we have to wait to see how this one is going to be valued against real earnings ahead.  Gabelli chatted up its organic and order growth of 4% to 6% a year versus 3% to 5% as an industry average, with acquisitions adding 1 to 2 points of growth. 

Gabelli even called Xylem “a highly attractive acquisition candidate for many diversified industrial companies.”  Gabelli went on to project $1.80 EPS in 2011 with a $36 private market value.  Robert W. Baird is so far the only analyst with a formal rating, and that is a “Neutral” rating.  If Gabelli’s target gets hit: over 34% upside.

JON C. OGG