Going for Growth

01/13/2006 12:00 am EST


Jamie Dlugosch

Editor, The Rational Investor

Jamie Dlugosch is dealing with growth in a myriad of ways beyond the potential of his two picks for 2006. He is facing a rapidly growing following as an editor and money manager, and with his second child due at month end, a growing family. Congratulations, Jamie.

"As a Rational Investor I tend to take a contrarian viewpoint with respecting to identifying stocks for a portfolio. Typically I want to own stocks that others are selling especially when the company being sold has a long history of success and brand equity. Fittingly, my 2006 conservative pick is Merck (MRK NYSE). In the wake of the Vioxx scandal the shares have been trading precariously near its lows.

"In 2005, the company withstood adverse judgments against the company in one Vioxx case, saw a mistrial in another, and was exposed for having deleted information about the drug in a previously published medical journal. One would think that such news decimated the company, right? Instead, shares actually gained a very small amount in 2005. Such performance is indicative of a stock that was dramatically oversold when Vioxx news first hit the company in 2004. Add in the nearly 5% dividend and investors had a fine year compared to the major indexes.

"Looking forward, I view the performance as base building for future gains. I like to compare MRK to the old Phillip Morris, now Altria (MO). Indeed the damage from litigation is painful, but tobacco stocks, a form of a drug, did nothing but appreciate in the wake of record settlements against the industry. MRK is a franchise under attack and that is a perfect time for Rational Investors to establish a position. There may be bumps along the road, but the risk appears to be worth the potential reward. My Rational target for MRK is $50 per share.

"Meanwhile, my speculative pick for the coming year is Sirius Satellite Radio (SIRI NASDAQ). One of the more deleterious consequences of the technology crash has been the reduction of risk taking. Corporate boardrooms have become exceedingly conservative and stock investors shun risk as if it were bird flu. The general environment for innovation has literally dropped as dramatically as the share prices of some of the former highflying tech companies.

"Rational Investors can capitalize on this inefficient behavior by peppering a portfolio with a handful of companies of the more speculative nature. The discounts for true innovators, as compared to previous periods of more active risk taking like the late 1990s, should be viewed as an opportunity. Sirius Satellite Radio (SIRI), my speculative stock of the year, is a prime example. In 2005, SIRI made tremendous strides in implementing its business plan. The company more than doubled its subscriber base in the year, raised guidance multiple times, and benefited from Howard Stern’s pending arrival in January.

"Its reward for such performance is a stock in retreat. That makes little sense to me at a time, when growth will be accelerating for the foreseeable future. With huge audience potential, rising rates, more features including streaming video, and advertising revenue on the horizon investors should use the weakness and current aversion to risk to establish a position in SIRI. In the short run, 12 months or less, SIRI could run significantly higher to $10 or more. My long term target is $20."

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