A Pair of Cautious Picks

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"The cautious seldom err." – Confucius

It is difficult to be much of an optimist in a market where you cannot go five minutes watching Bloomberg or CNBC without hearing the phrase "fiscal cliff." Despite positive comments from leaders of both parties on Friday, I do not see this issue being resolved without several false starts that have the potential to sharply impact the market. I am being cautious by avoiding stocks that investors will likely be selling through the rest of the year in order to book the lower capital gains tax rates of 2012. I am also staying away from stocks that look stretched from a valuation perspective or are dependent on solid worldwide growth in 2013 which I view as a low probability event.

I am looking to buy equities with low valuations, rising earnings estimates bright 2013 outlooks. A nice dividend yield is icing on the cake. Recently, I have found two money managers that meet these criteria. They have the extra benefit of they are likely to be less impacted from the additional regulations of Dodd-Frank that should pose significant challenges for other financial institutions like major banks.

Fortress Investment Group FIG is a publicly owned investment manager that provides its services to pooled investment vehicles, pensions, corporations, and other public and private entities.

Four reasons FIG offers solid value at just over $4 a share:

  1. Earnings are expected to jump from $0.44 a share this year to 60 cents a share in fiscal 2013. The stock is going for a forward P/E of under 7, a discount to its five year average (10.3).
  2. Oppenheimer recently upgraded the stock to Outperform from Market Perform and has a $7.50 price target on FIG. The mean analyst price target of the six analysts that cover the stock is $6 a share.
  3. Unlike most equities in this earnings season, consensus earnings estimates have risen nicely for both fiscal 2012 and fiscal 2013 over the past three months on Fortress.
  4. The stock works for best dividend and growth investors. FIG yields 4.8% and has a five year projected PEG of under 1 (0.63).

The Blackstone Group BX provides alternative asset management and financial advisory services worldwide. It operates in five segments: Private Equity, Real Estate, Hedge Fund Solutions, Credit Businesses, and Financial Advisory.

Four reasons Blackstone is a solid buy at under $14 a share:

  1. Analysts also believe BX has upside. The median price target by the 12 analysts that cover the stock is $18.25 a share.
  2. It also has had its consensus earnings estimates for fiscal 2012 and fiscal 2013 rise over the last month. BX yields 2.9% as well.
  3. Earnings are ramping up significantly. The company earned $1.25 a share in FY2011 but is on track for over $1.60 a share in earnings for fiscal 2012. Analysts project over $2 EPS in fiscal 2013.
  4. Blackstone is an undervalued growth and value play. It sells for less than 7x forward earnings and has a five year projected PEG significantly under 1 (0.43).

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