John Dorfman: Stocks worth a look, popular or not

Wall Street analysts turn up their noses at Eli Lilly & Co.

On a scale where 1.0 is “sell,” 3.0 is “hold” and 5.0 is “buy,” Lilly rates only a 2.9. Five analysts say to buy shares in the Indianapolis drugmaker, six say sell, and 12 duck for cover with a neutral rating.

A 2.9 score might not seem too bad, but bear in mind that brokerage houses have a positive bias. They are, after all, in the business of selling stocks. The average rating for stocks on the New York Stock Exchange is 3.8. Fully 87 percent of all U.S. stocks with a market capitalization of more than $500 million score higher than 3.0.

Lilly's low rating doesn't discourage me. I like the company.

I prefer stocks that are unpopular. If most of the major brokerage houses have already endorsed a stock, where will the impetus come from for it to gain new fans? What's more, when earnings improve or temporary problems dissipate, such stocks can garner analysts' endorsements and attract capital.

Lilly is one of five stocks I recommend this week that analysts couldn't care less about.

Like other big pharmaceutical companies, Lilly has major drugs with patents that will expire soon. Zyprexa, prescribed for patients with schizophrenia and bipolar disorder, accounts for about one quarter of Lilly's sales; its patent expires in 2011.

Still, according to a March 2009 analysis by Zacks Investment Research, Lilly's patent plight is less severe than that of some major competitors. Zacks estimates that Merck & Co. will see about 35 percent of its 2012 revenue exposed to generic competition and that Pfizer Inc. will lose patents on drugs accounting for 40 percent of its 2012 sales.

Its genuine problems notwithstanding, I consider Lilly an excellent value at its recent price of about $36, down from a high of more than $100 a decade ago. The stock sells for only eight times earnings. The dividend yield is 5.5 percent, and the payout seems secure to me.

Investors fret about what they see as scanty new-drug pipelines at all the big pharmaceutical companies. They worry too much. Lilly, for example, has about 60 drugs in various stages of development.

Analysts hold CNA Financial Corp. in even greater disdain. Only four analysts bother to cover the Chicago-based commercial insurer, and none recommends it; there are three “hold” ratings and one “sell.”

CNA is unlikely to win any awards as the best-run insurance company around. It has posted losses in four of the past 10 years, including 2008. That year it paid out $105.20 in claims and expenses for every $100 it collected in premiums.

I recommend it because it is cheap, and investor expectations are low. With the stock at seven times the past four quarters' earnings and 0.7 times book value (corporate net worth), there is ample room for positive surprises.

Consider this oddity. CNA is 90 percent owned by Loews Corp., a New York-based corporation controlled by the Tisch family. CNA accounts for the majority of Loews's revenue. Yet Loews has a buy rating from most analysts, while CNA is endorsed by none.

Andrew Tisch and James Tisch, who are CNA directors, both bought CNA stock on the open market in November, as did Joseph Rosenberg, chief investment strategist for Loews.

Another big yawn, according to analysts, is Enbridge Energy Partners LP, a pipeline partnership based in Houston. Ten analysts give it a neutral rating, with one “buy” and two “sells.”

Enbridge, the biggest transporter of oil to the U.S. from Alberta's tar sands, has made a profit each year since 1992, which is as far back as Bloomberg data on the company go. The stock sells for 13 times earnings and currently offers a dividend yield of more than 7 percent.

Next up is Lexmark International Inc. of Lexington, Ky., the second-largest U.S. maker of computer printers (Hewlett-Packard Co. is No. 1). Lexmark has earned a profit every year since 1994.

The bad news on Lexmark is that sales and earnings have declined in the past five years. With the stock at nine times earnings and less than 0.6 times revenue, it seems that investors don't expect much. Neither do analysts, who slap a 2.7 rating on the stock.

The third quarter showed a glimmer of hope: Lexmark's sales ticked up, compared with the previous quarter. I think the stock will be buoyed by the U.S. economic recovery that I believe is in progress.

My final recommendation is St. Louis-based Patriot Coal Corp. It is the fourth-largest eastern U.S. coal company, with annualized revenue of about $2 billion.

The company's stock market value is just $1.5 billion, and shares are trading for only 0.6 times revenue. Analysts give the stock a kissing-your-sister grade of 2.9. I think it is more exciting than that. In 2008, for example, the company earned a 33 percent return on shareholders' equity, which is sparkling.

Lately that profit measure has subsided to about a 19 percent return, which I still consider good. I like the stock at eight times earnings.

Disclosure note: I own shares of Merck personally and for clients. A few of my clients own Pfizer. I have no long or short positions in the other stocks discussed in this week's column.

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