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Buckingham's Prudent Speculations

11/07/2003 12:00 am EST


John Buckingham

Editor, The Prudent Speculator

John Buckingham is editor of The Prudent Speculator, the top performing newsletter for the past 20 years, with an average annual gain of 21.6%. When asked for his favorite investment, he cites his own fund, the Al Frank Fund--not out of immodesty, but because of its wide diversification. He also offers some individual stock ideas. (We caution that several of Buckingham's recommendations have risen sharply since his speech.)

"We try to buy tomorrow’s momentum stocks at today’s bargain prices. We’re looking for companies that will have earnings growth down the road. We look for out-of-favor, undervalued stocks. We look at companies trading at low p/e, low price-to-book values, and low price to sales. These are the typical value criteria. And while many value investors avoid technology, we like to invest in tech. We have about 40% of our mutual fund in tech. You can make money in technology if you buy the bargains. We like to buy when everyone else is selling them and then when they become hot, we’re the ones selling them.

"One of our strategies we call ‘cash is king’ where we look for stocks trading near the cash on their balance sheets. Most such companies have appreciated in price already, but there are still some bargains out there. Apple Computer (AAPL NASDAQ) and 3Com (COMS NASDAQ) have appreciated significantly this year, but Apple has $12 a share in cash and no debt and 3Com has $4 a share and no debt. I like the relative safety of having a strong balance sheet. I still like Sun Microsystems (SUNW NASDAQ), because I’m a contrarian. Everybody out there is telling me that Sun is a dying dinosaur. That makes me interested in the stock. There is about $1 per share net in cash on the balance sheet, and the stock is selling at three and change. Sun is a viable corporation and will eventually return to growth mode. I think buying it today at this bargain basement price will be a good thing for the average investor who has a broadly diversified portfolio.

"We have quite a few energy stocks. I do think there is value in the energy patch. Companies like OMI Corp. (OMM NYSE), a tanker operator trading at a single digit p/e. Another stock on our buy list is Transocean (RIG NYSE). I think a lot of the oilfield services firms have suffered as a result of the gyrations in the price of oil leading up to the Gulf war. As we get some stability in the price of oil–I know it’s still been volatile–I think you’ll start to see exploration and development budgets pick up and that will benefit those companies.

"We’re still very positive on the prospects for homebuilders. They are showing 15% to 20% earnings growth and trading at single digit p/e's. That’s pretty attractive as far as we’re concerned. We think that growth will continue for at least the next several years, perhaps through 2010. Demographic trends are favorable, We have the ‘not in my back yard’ crowd. It’s very hard to get through the regulatory process. Importantly, the large builders that we have recommended– D.R. Horton (DHI NYSE) Centex (CTX NYSER), Lennar (LEN NYSE), KB Homes (KBH NYSE)–they are able to take market share from the smaller builders. They can scoop up the small builders. They have better access to capital. Of course, the homebuilder stocks have appreciated significantly. But earnings are doubling every couple of years, which is why the stocks keep appreciating in value. I think as the homebuilders prove to the skeptical investors, that they will be able to continue to grow earnings even in a period of rising interest rates. I think you’ll start to see those multiples expand. So I still like the homebuilders, although they are a little pricey now.

"Here are some stocks that are currently very attractive: American Software (AMSWA NASDAQ) is the value stock to end all value stocks. The reasons I say that is the balance sheet. It has $4 a share in cash and investments on its balance sheet, and no debt. From the perspective of an extremely inexpensive valuation, this stock–now trading around $5.40–appears very attractive. The growth potential comes from the fact that it is a technology company. Investors are enamored with technology and can bid up stocks dramatically based on the hope of future profits. And they have been profitable during the tech downturn. The company has now decided to pay a dividend and it is yielding close to 5%. So you have a company with a fantastic balance sheet with growth potential, it's profitable, and it's yielding 5%. These are factors I think will make you happy down the road. If you don’t like technology, we have some old-stodgy chemical companies. Wellman (WLM NYSE), our latest stock of the month, is a plastics recycler. If you’re into socially-responsible investing, this might be a stock you want to look at. It is yielding over 4%. Granted the stock has moved up recently, but it’s an economically-sensitive stock that will enjoy positive earnings growth as the economy continues to recover."

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