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By Jeremy Glaser | 12-10-2010 06:00 AM

A Top Pick Today, Plus Two for Your Radar

Vice President of Credit & Equity Research Heather Brilliant offers up three wide-moat picks for your wish list.

Jeremy Glaser: For Morningstar.com, I'm Jeremy Glaser. It's Ideas Week, and I'm pleased to be joined today by Vice President of Credit & Equity Research Heather Brilliant to look at some stocks for your radar screen.

Heather, thanks for joining me today.

Heather Brilliant: Thanks for having me, Jeremy.

Glaser: So, you brought stocks that investors really should look at over all of 2011; one that's undervalued right now, one that's fairly valued, and one that looks a little bit overvalued. So, let's start there. What names looks a little bit rich to us right now?

Brilliant: Well, we really like the business of Fastenal, but we think it looks quite expensive right now. It is a company that is trading at about $58 per share. We think it's worth pretty close to $50 per share, but really the reason why we're bringing it up today is because we think it has a wide economic moat, and it's a business that at the right price we would be very excited to own.

Glaser: So, if there is a pullback, it's a great business to be in. What's something that looks like it's about fairly valued right now?

Brilliant: We think Compass Minerals looks fairly valued right now. Compass has some really unique assets. Again, another business we would love to own at the right price. They produce salt, rock salt for highway deicing as well as sulfate of potash, which is a fertilizer. And both of those, they have a low cost advantage in producing, and so, that gives them a really unique position. But right now, we think they are pretty fairly valued at about $90 a share.

Glaser: For someone who's looking at that stock, what would some of the potential risks be even at $90 a share or a discount to $90 a share?

Brilliant: Well, there is always a risk of pricing, and you are seeing some of that right now. In their last quarter that they reported, they had some weak pricing, and we don't actually think that pricing is going to be very strong this year, but given that, they are even more well positioned being the low cost producer. So, we think they will still come out ahead. And as they are investing in producing more from the facilities that they already have, they will have a great opportunity to earn excess returns in the future as well.

Glaser: And thinking about something that you might be able to pick up right now, what's your favorite pick at the moment?

Brilliant: My favorite pick at the moment is Lowe's, the home improvement retailer. We think Lowe's looks undervalued right now. It's right on the border of 4 and 5 stars, and we think it's worth about $36 a share. It's trading around $25, and it's a situation where the company has obviously been hit really hard by everything going on in the housing market. It is very closely tied to a recovery in housing, so if you start to see some improving data in the housing market over the course of 2011, we think Lowe's will do really well.

Glaser: Certainly, when Lowe's comes to mind, Home Depot is probably the next thing out of a lot of investors' mouths. Why is Lowe's a better value than Home Depot?

Brilliant: Well, we actually think that Lowe's is a better run company at the moment. Home Depot is doing a lot of work to try to improve some of its efficiency, which will probably result in some better margin improvement over time, and some of that is really already priced in to some extent. We do think Home Depot looks relatively attractive as well, though.

Glaser: But with Lowe's you get probably a better run business that's still cheap?

Brilliant: Yep.

Glaser: All right. Heather, thanks so much for your picks today.

Brilliant: Thank you.

Glaser: For Morningstar.com, I'm Jeremy Glaser.

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