If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
Navellier's Blue-Chip Bets
08/20/2004 12:00 am EST
Louis Navellier is one of the most respected advisors and money managers around. And it's no wonder. His Blue Chip Growth Letter returned over 90% between 1998 and mid 2004, outpacing the S&P by over 60 percentage points. Here are his latest favorites.
"The earnings season is ideal. This is the fourth quarter in a row with over 20% earnings growth, which are the best earnings since 1993. The bears on Wall Street will tell you that earnings momentum is decelerating. That’s absolutely true. The S&P had 28% earnings growth at the end of last year, 26% in the first quarter, and this quarter might decelerate to 25%. So there is a perception out there that this earnings season was poor, but I would argue that while there may be slimmer picking, if you pick them right, it’s fine. Our goal has been to find stocks that are fundamentally superior. And, indeed, in our Blue Chip Growth stocks, earnings came in 19% better than expectations. In MPT Review , our more aggressive letter, we’re seeing surprises up about 34%. In our most aggressive service, Quantum Stocks, the surprises were up over 40%.
"So, from our perspective, this is a stunning market environment. What happens when you have all these great earnings and the market doesn’t go up? Price to earnings ratios plunge, and that is exactly what is happening. I have no problem finding stocks with very strong earnings and sales growth, trading at very low multiples to next year’s estimated earnings. The S&P is trading at 15 times next year’s earnings. The all-time low was 13.3 times. So we are about to hit rock bottom here. In addition, corporate cash flow is at a record high. This is unbelievably bullish. And what are companies doing with this record cash flow? A lot of them are redeeming bonds, buying back stocks, and declaring dividends. Over 1,400 companies have declared new dividends since dividend relief was past last year.
"The best defense is a strong offense of fundamentally superior stocks. The fundamentals are the most important variables at this time—sales, profits margin expansion and sales stability, earnings momentum, return on equity, and cash flow. There are a lot of good things developing in the market. But we need a catalyst, some event that will cause investors to pour money back into the market. I suspect that if there are no terrorist issues after the convention—which is perceived to be a target— we will gap higher. I will tell you that in the summertime the breadth and power of the market is poor. We’re in the summer shenanigans, the volume is light, there’s a lot of cash building on the sidelines, there’s a lot of selling of bonds as rates go higher, and all this cash will eventually pour into the market.
"The biggest oasis out there is in energy. One of my picks would be Valero Energy (VLO NYSE), which is the biggest refinery in the United States. The company’s profit margins are soaring, and it’s no wonder why. Twenty years ago, when the last refinery was built in the US, there were 282 refineries. Today, there are less than 150. Buy below $84.We’re at full capacity in refining. Whether oil is at $35 or $45—it makes no difference— they are running full bore. It’s a great stock. Another stock in the energy sector is Occidental Petroleum (OXY NYSE). It’s got a 2.4% dividend yield. This is a great integrated oil company. It did get some Libya contracts. The company reported a 55% increase in profits. OXY’s earnings jumped to $581 million, or $1.48 share which easily beat expectations. The stock looks very strong here. Buy below $54. In the meantime, you get a good dividend yield with a lot of appreciation potential. I also like Alcon (ACL NYSE), a Swiss company that makes medicine for degenerative eye diseases like glaucoma as well as products associated with contact lenses. It is a $25 billion company. The stock soared on July 14 after the company raised its earnings guidance for the second quarter. Wall Street had been expecting 64 cents a share. The company said that it would earn close to 76 to 78 cents a share (excluding a favorable tax item). I would consider all three of these as ‘lock-and-load’ stocks, which you can bank for the next several months.
"Among trading ideas, I’d like to share two. The first is an easy and smooth trade— Starbucks (SBUX NASDAQ). Sales have gone up for 150 months in a row. You get free Wi-Fi broadband access at its stores. There are a lot of things going on. And, of course, caffeine is an addiction. The company continues to thrive. Some investors are concerned over the stock’s high p/e ratio. I’m not worried at all because the company is growing its profits so quickly. For this fiscal year, Starbucks will probably earn about 92 cents a share, that’s a 37% increase over last year. There aren’t many companies this large, growing that fast. The other trading idea is more aggressive. If you want to swing for the fences, we really like Research in Motion (RIMM NASDAQ) at these levels. They make the Blackberry devices. There are now more advanced cell phones that have the keypad on them. Research in Motion has a big market share in this area. They are on the cutting edge. The stock soared 15% in one trading session recently after it announced great earnings. The company netted 36 cents a share for the quarter, four cents more than Wall Street was expecting. The number of Blackberry subscribers ballooned to 1.3 million from 270,000 in the quarter before. The stock is still very volatile so I must urge caution when buying it. A stock like RIMM should only be a small portion of your overall portfolio.
"I also have three new recommendations for the conservative part of Blue Chip Growth Letter buy list.American Standard (ASD NYSE) is a leading manufacturer of air conditioning systems, plumbing products and auto braking systems. American Standard recently raised its 2004 earnings forecast, and now expects to earn $2.17 to $2.27 a share for the year, up from earlier projections of $2.08 to $2.20 a share. Buy ASD below $41. Hershey Foods (HSY NYSE) makes such well-known chocolate and candy brands and grocery goods such as baking chocolate, ice cream toppings, chocolate syrup, cocoa mix and peanut butter. Its operating earnings are being helped by the weak US dollar, so the company’s earnings outlook is excellent. I rate Hershey a buy up to $50. Procter & Gamble (PG NYSE) is also benefiting from the weak dollar. The company is the #1 US maker of household products, and it’s continuing to capture more worldwide market share. P&G is very well managed, and it now has 16 brands that are billion-dollar sellers. The outlook for Procter & Gamble is excellent, especially if the dollar remains weak. Buy below $59."
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