AT&T Heads List Of Barron's Picks This Week

Includes: AET, GS, T
by: Bret Jensen

Regular readers of these columns know I spend part of my weekend perusing Barron's to read some solid commentary and pick up some possible good stocks to investigate for possible investment. The weekly magazine is widely read in the industry and has a good long-term track record. I have had some solid winners over the years with stocks highlighted on its pages. In this weekend's edition, several well-known companies were called out as undervalued.

AT&T (NYSE:T) - The huge domestic telecom was dubbed as a good "Total Return" play in this week's magazine. The stock is up just 2% this year and has had less than half the overall stock market return since the end of the financial crisis. The stock could be a good play as its "catches up" to the overall market.

One of the most attractive features of this telecom equity that Barron's notes is its large (5.3%) dividend yield. The article mentions the stock yields more than the company's ten year debt (3.75%) as well. Its expected cash flow after capital expenditures should come in $14B this year, easily covering the $10B a year in dividends it will pay in 2013.

In its last reported quarter, the company added 551,000 "post-paid" wireless subscribers, including both cell phones and tablets. That was AT&T's second-best quarterly showing in four years. Finally, earnings should grow in the 6% to 8% range both this fiscal year and in FY2014 and the stock trades at a significant discount based on earnings to its main competitor Verizon (NYSE:VZ). Given the company's earnings growth and large dividend yield, its seems undervalued at under 13x forward earnings.

Goldman Sachs (NYSE:GS) - The large investment bank gets called out for its recent disappointing results especially when compared to the stellar results delivered by rival Morgan Stanley (NYSE:MS) during the same quarter. Barron's states the firm could attract an activist investor (NYSE:S) that could push the company to reduce its generous compensation levels among other shareholder friendly measures.

The stock does appear to have some upside as it is trading for just over book value and around 10.5x this year's earnings. Although investors were disappointed with Goldman's revenue figures this quarter, it is important to note that the company has blown through expectations on the bottom line for six straight quarters now. The average beat over consensus estimates has averaged better than 30% over that time frame.

Health insurer Aetna (NYSE:AET) was highlighted as one of several large S&P firms that consistently reward shareholders by buying back a good amount of stock with their free cash flow. The shares do seem to be undervalued here as well.

Earnings should post a ~15% Y/Y gain this fiscal year and the consensus earnings estimates for FY2014 currently have the company coming in with a ~10% gain in FY2014 as well. The company is also tracking to post a better than 30% revenue rise this year and analysts believe another 15% plus increase is in store for FY2014.

Given the company's growth in earnings & revenues, the shares are not expensive at 10x forward earnings. The stock sports a five year projected PEG of under 1 (.94) and the company has met or beat earnings expectations for five straight quarters. S&P has its highest rating on the stock "Strong Buy" and a $78 a share price target on AET.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AET over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.