During our Strategy Workshop (Oct. 12) we laid out rationale on where global risk sentiment lies, ho...
My Strategy Lab Stock Picks
08/14/2008 12:00 am EST
Howard Gold is on vacation. This piece originally ran in MSN Money on Wednesday, August 6th.
As my first Strategy Lab strategy piece spelled out, I don't think most individual investors should be buying individual stocks and those who do should use only 10% to 20% of their investable assets to buy them. 80% to 90% of your portfolio should be in broadly diversified stock, bond, real estate, and commodity mutual funds or ETFs. That's the "core."
Having said that, you can make money in the "explore" part of your portfolio. I usually do that with ETFs in my own investing. But based on my outlook for the next six months, this is an extremely difficult time to play sector or country ETFs.
We're still in a bear market, waiting for the new bull to begin, we face a major presidential election, and the economy is going in all different directions. I agree with Andrew Horowitz that energy and commodities have had their run for a while, but I'm not ready to take the plunge on the financials, homebuilders, or other beaten-down sectors tied to the consumer or the availability of credit.
That's why although I'm amazed I'm writing this, some well-chosen individual stocks may actually be better, less risky bets than ETFs for the next few months. But those stocks need to be solid, insulated from the credit crisis and the consumer, well priced, and have strong momentum.
I've found four stocks, all well-known names, that meet the criteria. They lean to the growth side of the spectrum and have held up well in the bear market. They're all market leaders with strong franchises, solid balance sheets, and good growth prospects.
All of them get "A" grades from Louis Navellier's PortfolioGrader Pro rating system (which combines momentum and fundamentals) and Buy recommendations from MarketGrader's fundamental ratings. The best of both worlds, in other words. Here they are, in no particular order:
IBM (NYSE: IBM) has been one of the few stars of the Dow Jones Industrial Average, gaining nearly 20% this year, easily beating Wall Street's earnings estimates for the recent quarter, and boosting its guidance for the future.
International sales account for a majority of revenue, its software and services businesses are growing at a double-digit pace, and even mainframe computers are holding up well. IBM's secret: It isn't tied to the consumer, and the services and products it sells to businesses make those enterprises more efficient. That's helped IBM's revenue growth move up sharply, into the mid-teens (half of that gain is because of the weak US dollar). Meanwhile margins of all kinds are growing, and return on equity was a whopping 36.6% in 2007, according to Standard & Poor's.
The powerful second-quarter report prompted analysts to boost their estimates. Big Blue should be able to earn almost $9.00 a share this year and ten bucks in 2009. Changing hands at around $128, near its 52-week high, IBM is still trading at only 14x this year's projected earnings and 13x next year's. Clearly this stock has the wind at its back. I'm investing $10,000 in it for Strategy Lab. It opened above $128 on Wednesday, August 6th, when my Strategy Lab investment was made. (Full disclosure: My wife has a small position in the stock.)
Johnson & Johnson (NYSE: JNJ) is one of the world's great companies, a diversified, consistent earnings grower. A great product mix (split between pharmaceuticals, medical devices, and consumer products) and a smart, disciplined management has helped its stock thrive (up 7.6% this year) while most of Big Pharma languishes.
Like IBM, J&J is a global company, getting nearly half of its revenues from overseas, and the weak dollar has definitely been a plus. Any temporary rebound in the dollar of the kind I've predicted will take a while to hurt either of these companies-certainly well beyond Strategy Lab's six-month time period.
J&J's recent purchase of the consumer products division of troubled Pfizer (NYSE: PFE) will give it new heft in that area, now bringing in a weighty $15 billion in sales. J&J now sells Band-Aid, Neutrogena, Listerine, and Visine, as well as over-the-counter drugs such as Sudafed, Zantac, and Tylenol. It paid a big premium for Pfizer's assets, but expects to get substantial cost savings out of the deal. J&J's management likes to remind people that it walked away from a bidding war with Boston Scientific (NYSE: BSX) for medical-device maker Guidant, which turned out to be one of the worst acquisitions of all time.
S&P estimates J&J will earn $4.50 this year and $4.75 in 2009. So, it's trading at 15.5x this year's projected earnings and at 14.7x next year's. Ideally I'd like to get it a bit cheaper, but this stock should hold up very well no matter what the market throws its way. I'm investing $10,000 of my Strategy Lab money in it, too. It opened a little above $70 on August 6th.
Qualcomm (Nasdaq: QCOM), one of the great technology stars of the late 1990s, is back and may be stronger than ever because of its lock on the emerging 3G CDMA global wireless standard. Qualcomm sells chipsets and software solutions to wireless handset manufacturers, which use its technology in their phones. It stands to reap big profits as "smartphones" go mainstream. The recent settlement of a legal battle with Nokia (NYSE: NOK) has removed a big obstacle to growth.
Qualcomm is racking up 15% to 20% earnings growth per annum and has no debt and a ton of cash. A bigger global economic slowdown would no doubt hurt, but it's clearly on the cusp of a huge new product cycle that can drive earnings higher for years. Again, at $55, around 25x this year's projected earnings and 21x next year's, I wish it were cheaper, but I'm not holding my breath. I'm buying $10,000 worth of Qualcomm stock in Strategy Lab. It opened above $55 on August 6th,
The San Francisco-based company is the leading provider of digital technologies for the entertainment industry worldwide, including surround sound systems for movie theaters (and IMAX, too), home theaters, computers, and video games.
Although sales of flat screen TVs have slowed, personal computer (PC) sales have been surprisingly strong, helping Dolby blow through Wall Street's estimates when it reported its fiscal third-quarter earnings last week. It posted a 56% profit surge and hiked its outlook for the year. Strong international growth, solid PC and game-console sales, and perhaps a resurgence of home theater purchases as people stay home for their entertainment could keep this stock rolling for the rest of the year.
The shares change hands at more than 20x this year's and next year's earnings, but its growth should more than back that up: I'm expecting analysts to revise 2009 numbers upward, adding more fuel to this stock's fire. I'm buying $10,000 worth of Dolby Laboratories for Strategy Lab. It opened above $40 on August 6th.Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own and are not necessarily the views of InterShow or MoneyShow.com. Unless otherwise noted, he did not own the securities mentioned in this column.
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