Quality Companies Left Behind

Hit em where they ain't.
-- Baseball legend "Wee Willie" Keeler

Investors who have watched from the sidelines the last five months have a problem. They may want in on the market but they don't want to look silly if it takes a dive. With the market up 50% off the lows and many high-beta names up triple figures -- it's quite possible to get picked off at the top as money leaves the more momentum-oriented names.

Here are a few ideas where the momentum crowd ain't, but perhaps there is some value.

McDonald's (MCD - commentary - Trade Now) has one of the best business models on earth. It operates 32,000 restaurants around the globe, 80% of which are owned and operated by franchisees. The typical arrangement calls for McDonalds to collect a royalty on sales. Meanwhile the franchisee puts up a portion of the capital to build out the location on real estate that McDonald's owns or holds a long-term lease on.

This model creates enormous free cash flow and last year the company returned $5.8 billion to shareholders through dividends and buybacks on $23.5 billion in sales. Operationally the company is hitting on all cylinders, but its share price is down approximately 9% year-to-date. Seems to me that McDonald's is down simply because it performed so well last year (up 6%) and money is flowing to more depressed names.

The health care sector has been beaten up on a number of levels. Not only has big pharma had to deal with patent expirations but also come to grips with hazards of government reform. Recently though the pin action in the group has been pretty good.

Novartis (NVS - commentary - Trade Now) and Sanofi-Aventis (SNY - commentary - Trade Now) -- names that I mentioned in my May piece "Big Pharma: Relatively Likable" -- have advanced better than 10%. Now I'm adding another to the basket -- Eli Lilly (LLY - commentary - Trade Now). Sure I know the company is staring at patent issues and it recently pulled the plug on Arzoxifene, an osteoporosis drug. But that's the nature of the drug development game and why I build baskets.

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At the time of publication, Masino was long Long McDonald's, Lilly, Hudson City, Novartis, Sanofi-Aventis and Citigroup, but positions can change at any time.

Rich Masino is president of Private Investor Research and editor of The Substantial Investor. He is a private investor who manages a family long/short investment portfolio that holds numerous positions across a variety of asset classes.

Before starting Private Investor Research, Mr. Masino co-founded a telecommunications company that grew to 500,000 customers. He sold all of his interests in the company in 1998.

He holds an MBA in finance from St. John's University.