Top Performer's Top Picks

08/26/2005 12:00 am EST

Focus:

Louis Navellier

Editor, Blue Chip Growth and Emerging Growth

By using two independent systems - one quantitative and one fundamental – Louis Navellier has developed one of the industry’s most successful records. In fact, his Emerging Growth buy list sits atop The Hulbert Financial Digest's 15-year rankings. Here's his latest.

"The market is now clearly broadening out. And it’s very odd for the market to strengthen in the summer. I know that most of my Wall Street friends don’t work in the summer. They are on Martha’s Vineyard and in the Hamptons. There is a saying on Wall Street that goes, ‘Sell in May and go away.’ One of the reasons the market is rallying now is that there is a lot of foreign money coming in. The dollar got very strong this year, bond yields collapsed in the second quarter. Everyone from abroad now wants to invest in the US.

"Meanwhile, volume tends to pick up after Labor Day when our Wall Street friends return from their summer hiatus. Then we get pre-announcement season, and we expect positive news with a reacceleration of earnings for the rest of this year. There is a lot of excitement brewing. We are now at the best growth to p/e ratios that I’ve witnessed in 25 years. Investors today can get great growth at low p/e multiples.

"As for specific stocks, our quantitative analysis assesses buying pressure. We want to know if money is flowing into or out of a stock. This screening system clearly adds value and clearly works, and it’s the first step of our process. The second step is fundamental. We rank stocks on factors such as sales growth, profit margin expansion, earnings stability, and momentum. We then combine these two systems in order to get a total score. And we do that every single weekend for a database of over 5,000 stocks.

"Housing stocks are still pretty viable. Some of them have boosted their dividends more than 20-fold. And dividend is only taxed at 15%. So we’ve seen a lot of aggressive share buybacks and dividend increases. Meanwhile, the Fed does not want to burst the real estate bubble. They just want to let a little air out of it. Five out of 6 Americans now have more money in their house than in the stock market. So if they burst the real estate bubble, they will destroy the economy by destroying consumer confidence. There are some soft spots, but I think the real estate market and homebuilders still have a lot of life.

"Building Materials (BMHC NASDAQ) is a big supplier to the home building industry. They build trusses and have huge building centers. All the contractors go there to buy products when they are building houses. The stock has a very good growth to p/e ratio so we are very comfortable with it right now. Also lumber prices and other material costs have come down. That allows them to pad their profits and expand margins.

"Toll Brothers (TOL NYSE) was downgraded to neutral recently by a Wachovia analyst, who cited a slowdown in growth in the DC housing area. But the truth of the matter is that there is still a lot of household formation in the US. There is a lot of cheap mortgage money out there. Meanwhile, Toll Brothers builds more expensive homes, and are very well known for their golf course communities. These communities are very well run. They are also big down in Florida. These luxury homes tend to be less sensitive to financing, so as housing slows down, Toll will likely still be the ‘last homebuilder standing.’ This stock is a great buy right now.

"Meanwhile, instead of complaining about high gas prices, we should be looking at the sector and figuring out how to profit from it. We don’t want to worry about the price of oil; we want to prosper from it. Energy stocks have been in our portfolios for a couple of years, and even now, about 40% of our holdings are in energy stocks. We have integrated oil companies such as ConocoPhillips (COP NYSE) and Occidental Petroleum (OXY NYSE). Even though they are up sharply, they still have high dividend yields and record cash flow. Conoco just announced a billion share buyback. These stocks look very good.

"Our most volatile energy holdings would be the Canadian tar sand companies such as Canadian Natural Resources (CNQ NYSE) and Suncor Energy (SU NYSE). Canada has the second-highest proven reserves of oil in the world. However, there is one problem: They need to use natural gas to generate the steam to extract oil from tar sands, and they don’t have enough natural gas. There is also a shortage of natural gas in the US due to the heat wave we’ve had, especially in the south and the west. So we still like the natural gas stocks like Anadarko Petroleum (APC NYSE) and Burlington Resources (BR NYSE).

"Meanwhile, you might remember that President Bush went up to Canada after the election. The media said he was up there ‘mending fences.’ But it was more than that. He was up in Halifax, Nova Scotia, where a lot of liquid natural gas (LNG) ports are going to be built. There’s no way you can convince anyone in Long Island or Connecticut, Rhode Island, or Massachusetts to put an LNG port in their backyard. So we’re going to put them in Canada. In the LNG specialty area, we like BG Group (BRG NYSE)."

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