Three firms the market forgot

Professional investor Mike Savage spends his time looking for financially sound, cheaply rated firms that may have fallen off the market's radar. Here, he picks three very different companies that he thinks will cut the mustard and give investors good returns.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Mike Savage, manager of the Special Situations Fund at Killik and Co.

My focus at Killik and Co is to give retail investors the same type of access as institutional fund managers to two areas: first, attractive initial public offerings and secondary fund raisings; second, financially sound, cheaply rated firms that may have fallen off the market's radar. Here are three companies that cut the mustard.

Barrick Gold, the world's largest gold miner, has spun off its African gold assets to create African Barrick Gold (LSE: ABG), although it will retain ownership of around 75% of the firm. African Barrick Gold's assets are long-life and technically low-risk operations, comprising four operating mines in politically stable Tanzania. With total attributable resources of 25.9 million ounces, the firm is larger than any of its peers and is expected to become the largest London-listed gold company by production. Attributable production from the four mines was 716,000 ounces in 2009, at a net cash cost of $533. For 2010 the expectation is for 800,000-850,000 ounces of production at closer to a $450 cost of extraction.

The firm is exposed in so far as its fortunes are tied to the gold price. But we concur with the yellow metal's safe-haven status. We particularly like the protection it should afford investors in an inflationary environment. It is also a hedge against the weak dollar, which, ultimately, will be the price paid for the US government printing trillions of dollars to refloat the economy. We also think the gold price is supported by a combination of increased investment demand, central bank buying, and global mine supply contraction.

The overall valuation is attractive relative to peers, while the 25% free float (defined on page 45) means there is scope for tracker funds buying in to push the shares higher too.

My next pick is Dart Group (LSE: DTG) because it is fundamentally very cheap and trading well. Dart Group has two divisions: discount airline Jet2.com and a well-regarded food distribution unit supplying to supermarkets and their suppliers, food manufacturers, growers and importers. The shares, which have strong asset backing, have been weak lately, particularly relative to discount airline peers (such as Easyjet and Ryanair). However, we believe the trading outlook is solid, and the shares trade on only around five times 2010 earnings and offer a dividend yield of 2.5%.

My final pick is Cove Energy (LSE: COV). Cove Energy has Tanzanian gas interests, but it is Mozambique, especially the off-shore prospects, that are really exciting. The firm hold an 8.5% interest in the Windjammer well, where a significant gas discovery was recently announced. The well, with estimated gross resources of four trillion cubic feet of gas, was drilled at a cost of close to $100m. That's on the steep side, but future prospects are expected to be markedly cheaper. Industry giant Anadarko (with a market capitalisation of $35bn) is running the project and has secured a state-of-the-art deepwater rig. It is now planning up to a further five deepwater wells following the Windjammer success.

Naturally, Cove Energy's management wishes to ensure that ample working capital is available from raising new funds so that the company can continue to maintain its interest in such a potentially exciting drilling programme. We agree that the outlook is promising and investors should stock up on the shares.

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