11/12/2004 12:00 am EST
"With the election over, we are back to business as usual, and we'd like to share some of our favorite picks for the year ahead," says Price Headley. Here, he highlights four favorite stocks that are "innovators in their space" and poised to be winners over the next 12 months.
"From soaring energy prices to a divided electorate and the still uncertain impact of rising interest rates, it's a challenging environment to be sure. But remember, over the past year, corporate profits have surged to an all-time high after a severe recession. Also, US corporations are now sitting on a record amount of cash. Meanwhile, the reality is that politicians have a limited and mostly indirect impact on important longer-term economic variables. Certainly, tax cuts and other stimulus can spark or support consumer spending and confidence, but typically innovation and productivity gains have been a bigger force in economic progress. That means that we tend to favor putting some money to work in stocks of companies that either are innovators in their space or beneficiaries of secular, longer-term trends that favor their particular business or industry. Here are some favorites:
"Despite a sky-high valuation Yahoo! (YHOO NASDAQ) has demonstrated an ability to position itself to maximize exposure to emerging trends in Internet advertising. Moreover, the company, under CEO Terry Semel, has shown an uncanny knack for finding new sources of revenue with minimal capital investment on its own part. Yahoo's foray into online music sales is likely to ramp up pretty quickly, and we expect that expanded premium e-mail services and tighter integration of personalized content and local search to keep its rivalry with top competitor Google interesting. In the long run, Yahoo's breadth of services and content should give it the edge. Our selection of Yahoo is also a broader bet on the sector as well. While valuations in the group are clearly a concern, the Internet sector clearly benefits from secular (long-term) growth trends, as consumers come to increasingly shop and conduct business over the internet.
"Qualcomm (QCOM NASDAQ) owns some of the most important underlying technologies supporting cell phone communications. It also boasts a pristine balance sheet that has allowed it to continue to invest in emerging technologies, including in the areas of cell phone displays and power management to enhance cellular communications and enhance its own dominant position in the telecom industry. Upping quarterly guidance has become almost routine for the company as it continues to benefit from surging growth in key units. Looking ahead, the company will likely continue to benefit from forward-looking initiatives to invest in expanding acceptance of its own technology standards across the globe, from Europe to emerging markets like China. Additionally, with strategic enhancements in chip technologies and its own operating system, the company will likely build further growth.
"To some degree, Target (TGT NYSE) is a play on possibly overblown fears of a consumer spending slowdown. As contrarians, we think that the consumer spending slowdown widely expected by analysts won't be as severe as some expect. Target, America's No. 2 retailer, has successfully shed some lower growth assets in the past year, we think the company may be nearing an inflection point where its growth begins to significantly outpace that of its larger rival, Wal-Mart. Additionally, as the company expands its own forays into the 'superstore' arena and considers international expansion, there's clearly room for more growth. Additionally, the company has shown a clear knack for leveraging its sharp marketing, cheap chic brand image, and affordable designer wares into earnings. Thus far, the market remains skeptical: Target stock trades at just a slight premium to a market multiple based on forward earnings and at a discount to Wal-Mart on various key metrics, from price-to-cash flow to price-to-book ratios, while also generating a slightly better return on equity. Faster growth, cheaper stock. If you're shopping among the big retailers for a stock buy, what more could you want?"