My 'Market Madness' Picks

 | Mar 23, 2013 | 1:00 PM EDT  | Comments
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tfm

,

emc

Like millions of Americans, I dutifully filled out my brackets this week for the local March Madness contest. A couple of observations came to me while I was going through the exercise. First, the No. 1 seeds are not what they have been in years past. Missing are the dominant teams from dynasties like Kentucky, North Carolina and Duke. Louisville as the overall No. 1 seed? Gonzaga as the No. 1 seed in the West? The "chalk" has rarely looked so vulnerable.

On the flip side, some very good 4-6 seeds would not shock anyone should they make the Final Four, like VCU, Michigan, Butler and UCLA. This to me is reminiscent of the market right now. The No.1 seeds, like Google (GOOG) and Amazon (AMZN), either have already had good runs or are wildly overvalued. I'd rather bet on the next tier of stocks that are either up-and-comers, like UNLV, or are former No. 1 seeds, like Michigan, that faded a bit in midseason but could still be good bets to make the Final Four. The payoff from betting these non-chalk teams to reach the Promised Land is also much higher. Here are the two stocks of that ilk worth a wager.

The Fresh Market (TFM) is an up-and-coming specialty food retailer with approximately 130 stores in 25 states. It operates in the shadow of Whole Foods (WFM). What caught my eye about this name? Friends who have been going to Whole Foods for years are going to the Fresh Market just as often now. I find myself doing the same (just don't go on the weekends, it is a madhouse). The retailer has plenty of room to expand and has a solid balance sheet. The secular trend towards healthier and more organic food is in its early innings and certainly can support more than one major player.

The stock sells around $42 and is priced at about 22x 2015's projected earnings. However, it is also growing revenue at just under 20% annually and the stock is cheap if the company can successfully take its concept national. The stock is starting to garner analyst attention and Raymond James initiated the shares as a Strong Buy with a $50 price target Wednesday.

EMC Corp. (EMC) is a leading data-solution company. It reminds me of a top team that had a midseason slump but just might get its act together in time for a deep run in the tournament. First, EMC is ideally positioned to continue to benefit from the exploding amount of data that companies have to maintain and leverage. Second, its valuation is very reasonable at 12x 2014's projected earnings, and it has more than $4 billion in net cash on its balance sheet. In addition, VMware (VMW) is behaving much better recently and seems to have recovered its footing after a recent stock slump (EMC owns 80% of VMW and this stake accounts for more than 50% of its own market capitalization).

Its joint venture with Cisco Systems (CSCO) is going well, recently achieving a $1 billion annual revenue run rate. It also is going to take public of a collection of businesses called Pivotal, which focuses on data analytics and helps companies deal with "Big Data." This new company should have $300 million in sales in 2013. Given how hot this niche is, the initial public offering should be well received, and EMC will retain just under 70% of the new entity.

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