Markman: Five Themes for '04

12/12/2003 12:00 am EST

Focus:

Jon Markman

Editor, Trader's Advantage

Jon Markman is the editor StockTactics Advisor;a portfolio manager at Pinnacle Investment Advisors, and columnist at CNBC on MSN Money. His expertise extends from swing trading to long-term investing. Here, Markman profiles five investment themes to watch in 2004, along with a  top stock pick in each of these areas.

"These names have four factors in common: They are growth stocks with expanding price-to-earnings multiples; they generate a lot of cash flow; they are in the middle of big economic, cultural, financial, or political themes; and they were up nine of the past 10 calendar years, through both bull and bear periods for the overall market.

(Editor's Note: Markman notes that these stocks are expensive. One in particular, Engineered Support, has soared in price since his initial recommendation. Markman cautiously suggests that those interested in these stocks should consider purchase on "inevitable pullbacks.")

Theme: US military adventures overseas continue.

"Engineered Support Systems (EASI NASDAQ) is a low-brow way to play this theme, as it supplies the nuts and bolts of armed conflict. Since modernization of the fighting force at a reasonable price will be a key focus of Pentagon spending in 2004, the skilled innovators at Engineered Support should do better than companies that supply big-ticket items. The stock is up 115% in the past year as earnings and sales growth have reliably improved 25% to 40% annually for the past decade; cash flow is strong and rising; return on equity is a nice 21%; there’s no debt; and trailing 12-month income was $37 million on $520 million in sales."

Theme: Global trade accelerates despite increasing threats of protectionism.

"Expeditors International of Washington (EXPD NASDAQ) is the Dell of transportation, as it generates mountains of cash flow without tying up hard assets or inventory. It has grown without acquisitions to a $4 billion market cap via reliable 15% to 20% earnings and revenue growth over the past decade. It has $300 million in cash, no debt, and its P/E multiple has expanded from 17-20 a few years ago, to a premium 30-35 today. Shares are up 20% this year; they were only down once in the past 10 years (-3.6% in 1993); 10-year annualized return is 33%.

Theme: Weakening dollar and the rise of consumers in Eastern Europe, India, and China

"William Wrigley Jr. (WWY NYSE) is one of the most underappreciated consumer-products companies in the country. This high-cash flow, no-debt, family-run outfit is the low-cost producer in all its markets and a powerful innovator in everything from flavor agents to gum-wrapping technology. Since 60% of sales are overseas, a weaker dollar will improve earnings considerably. The company is moving tentatively but steadily into new areas of potential growth, such as teeth-whitening gum (Orbit White), antacid gum (Surpass), breath-freshening gum (Eclipse), breath-easing gum (Airwaves) and throat-lozenge gum (Alpine). The company is also moving into such markets as China and India. Shares have fallen just once in the past 10 years (-5.95% in 1999). If you are worried about stocks in 2004 but need to own something, Wrigley could be your stick.

Theme: Aging baby boomers and their bum knees

"Stryker (SYK NYSE) is the nation’s leading maker of orthopedic implants. Stryker earned $425 million on $3.5 billion in sales in the last 12 months, and investors have rewarded its reliability over the past decade with a P/E multiple of 37 and a market cap of $15 billion. This is a stock that is rarely cheap, as it has pulled down 18%-22% revenue growth, 20%-30% earnings growth, loads of cash flow and a 21% return on equity seemingly forever. The stock is up 22% so far this year, has offered a 22% annualized return over the past 10 years, and has only faltered once in the past decade a 26.7% decline in 1993.

Theme: Regional/small bank consolidation

"First BanCorp. (FBP NYSE) is the second largest in Puerto Rico and thus would make an ideal purchase for a Citigroup or Bank of America. It has been in business 55 years, regularly registers 15%-20% earnings growth on better-than-average profit margins, sports a relatively modest P/E multiple of 14 and has a 1.5% dividend yield. Puerto Rico has higher population density than any US state (1,100 people per square mile) and demand for housingthe key focus of any regional bank’s lending department is growing. Shares are up 33% annualized over the past 10 years, and 69% this year; the only decline in the past decade came in 1999."

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