Strike Up the Band

10/16/2002 12:00 am EST

Focus:

Richard Band

Editor, Profitable Investing

Richard Band is best known for his focus on combining long-term value investing with contrary opinion. And, indeed, in the current market environment, no position can be more "contrary" than an all-out buy signal. But in a special alert to his readers last week, Band said, "A monster rally is about to break loose on Wall Street." In the latest issue of his Profitable Investing newsletter, Band highlights three stocks for current purchase.

"It's time to be fully invested in stocks, up to your personal limit. A bunch of my most reliable indicators have flashed a powerful buy signal. Even as the media headlines scream that the market is getting worse and worse, the charts are whispering that the downtrend has burned itself out.

NOKIA (NOK NYSE) announced that third-quarter revenues will come in slightly below expectations. The culprit: sluggish sales of telecom networking equipment. Handset sales, on the other hand, are tracking well – and thanks to NOKIA’s now legendary cost cutting, profits for the quarter should meet prior forecasts. On the whole, this is a classy performance under extremely stressful conditions by one of the world’s great growth companies. Buy NOK at $17 or less. Currently, the stock is trading at only 14 times my estimate of normalized mid-cycle earnings. In my opinion, this is an authentic bargain.

“Investors should focus on companies with projected earnings growth of 8% to 15% a year. One timely example is Morgan Stanley (MWD NYSE) which can be bought below $48. The firm is a powerhouse in financial services. Over the long pull, this is an industry I expect to grow somewhat faster than the economy at large, with less risk. Among its peers, I think Morgan Stanley has the greatest upside potential (30% to 50%) in the next 12 months, because it’s trading at only eight times my estimate of mid-cycle (2004-2006) earnings.

“I would also note that dividend-paying stocks tend to be less risky than those that pay nothing. As a rule, companies that ‘share the wealth’ with their stockholders, and increase their dividend payouts year after year, can afford to do so because they generate plenty of excess cash, over and above the needs of their business. Case in point: Lloyds (LYG NYSE), Britain’s stongest and best-managed banking organization. Lloyds has doubled its dividend over the past five years. Yet the company also retains enough cash to maintain a sparkling AAA balance sheet – a powerful selling point in today’s safety-conscious marketplace. Buy LYG at $39 or less. It’s currently yielding a generate (and secure) 6%.  And there is no foreign withholding tax on the dividends.”

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