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He wants companies with an edge.

A “masterpiece-type” company, one with a long-term sustainable advantage over competitors, is what Jeff Van Harte looks for when he buys stocks for Transamerica Premier Equity (800-892-7587). Van Harte also likes companies that are in the early stages of changing for the better. The favorites he cites here are among his fund’s ten biggest holdings.

* First Data (FDC). The world’s largest processor of electronic transactions, First Data benefits from the move to a cashless society. People use credit cards in about 30% of all point-of-sale transactions, and that figure should climb to 50% by 2010, says Van Harte. First Data processes nearly half of all domestic credit card transactions. It also owns Western Union, which benefits from the growing number of migrant workers who need a convenient way to send money home. First Data, recently trading at $68, should earn $2.50 per share this year and $2.90 next year, and is capable of 15% yearly profit growth, says Van Harte.
 MBNA (KRB). The key competitive advantage of MBNA, the nation’s second-largest credit card issuer, lies in its success in marketing to banks and affinity groups: It has 4,500 affinity relationships and offers 20,000 unique cards. This has allowed MBNA to attract customers with higher balances while avoiding big losses for bad debts, achieving what Van Harte calls “the sweet spot of the credit card business.” He says MBNA is capable of 12% annual profit growth over the long term. It should earn $1.90 per share this year and $2.20 in 2002. The stock fetches $37.

* Qualcomm (QCOM). To Van Harte, Qualcomm is the Intel and Microsoft of the wireless-communications world rolled up in one. As the owner of the proprietary CDMA standard, Qualcomm receives royalties and licensing fees from wireless-equipment companies. It also makes chips for use in wireless devices. A recent cross-licensing deal with Nokia, the leading wireless-handset maker, is a “watershed event” that cements Qualcomm’s leadership position. This is a more expensive stock than Van Harte’s other picks. At $66, it sells at 51 times the $1.25 to $1.30 per share that he thinks the company can earn next year. He puts long-term growth at 25% per year.

* Rite Aid (RAD). This nationwide operator of 3,880 drugstores is changing for the better, in Van Harte’s view. The stock, which had been as high as $51 in early 1999, plummeted to less than $2 late last year in the wake of accounting irregularities and allegations of improprieties by previous management. But, says Van Harte, a new executive team led by Robert Miller took over 22 months ago and has done a good job of fixing the mess. Meanwhile, the company, which should benefit from an aging population’s growing demand for pharmaceuticals, “is set up to grow nicely.” Rite Aid has quite a bit of debt-$3.8 billion–but Van Harte expects it to begin generating positive free cash flow this year. The stock is now $8.

This Financial Services article was written by Manuel Schiffres on 6/1/2005

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