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Three hardy survivor stocks to buy now

The recession has forced some industries to consolidate, permanently reducing capacity. This leaves the survivors with much greater pricing power. And it’s these survivors that professional investor Jane Coffey believes offer the best opportunities for 2010. Here she picks her three favourites.

Each week, a professional investor tells MoneyWeek where she'd put her money now. This week:Jane Coffey, head of equities at Royal London Asset Management.

Many firms have been surprisingly good at cutting costs and maintaining margins during one of the sharpest deteriorations in global economic conditions since World WarII. While the stockmarket seems fixated on firms delivering sales growth to push share prices higher, I see these improvements in profitability as the real driver of future performance.

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The recession has changed the mentality of senior managers, pushing them to make significant and long-lasting changes to their businesses. Certain industries have also consolidated, permanently withdrawing capacity, leaving the survivors with much greater pricing power. It's these survivors who have restructured to improve profitability that I believe offer the best opportunities for investors as the economy rallies in 2010.

Compass (LSE: CPG) is a prime example of a company seeing a significant and sustained increase in operating margins, driven by new CEO Richard Cousins. The firm is a global leader in contract catering for offices, schools and hospitality events. Since joining the firm in 2006, Cousins has generated a consistent uplift in margins every quarter as he focuses on reshaping the business and sharing best practice from each region. Compass is already achieving a 6.5% earnings before interest and tax margin, up from 4.5% in 2006. That's despite having seen a big fall in turnover in its more cyclical divisions.

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Furthermore, revenues look set to pick up as employment levels improve and corporate entertainment spending returns. The ongoing wider shift by organisations to outsource their canteens should also provide support. So I expect to see double-digit annual earnings growth from the company for the next three or four years. Despite that, the shares trade on just 12 times 2010 earnings, even as the firm generates over £600m of free cash flow.

Thomas Cook (LSE: TCG) is another company with a better outlook after the recession than it had before. Serious industry consolidation means TUI and Thomas Cook now dominate, giving them greater future pricing power. Despite the fall in passenger numbers, around 15% of capacity has disappeared from the market and late bookings have been won through low prices. The stock trades on less than seven times 2010 earnings. However, this discounts too heavily worries about the weakness in consumer spending in the short term and underestimates the long-term margin improvements that will flow to the remaining firms in a smaller industry.

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My final tip, AstraZeneca (LSE: AZN), has also faced a tough environment, but is emerging in much better shape for it. Less cyclical than many, the pharmaceutical firms are nonetheless facing constrained government budgets and the expiry of patent protection for many of their blockbuster drugs. However, new CEO David Brennan has shaken up the firm's culture and brought in executives from outside the industry to improve procurement and cut operating costs. Indeed, his focus on cash generation and cost management has already raised margins and I believe there's a lot further to go. The stockmarket is focusing on concerns about the strength of the drugs pipeline. But I think this is an extremely cheap stock on eight times 2010 earnings especially given that it could generate its entire market capitalisation in cash over the next six years.

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The stocks Jane Coffey likes

12-month high12-month lowNow
Compass411p235.5p407p
Thomas Cook303.5p124p212p
AstraZeneca2,966p2,126p2,717p
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