Ring Up, Dig Down
01/27/2006 12:00 am EST
Ivan Martchev is a member of the all-star KCI editorial team. For his favorite conservative stock for 2006, he rings up telecom player, Verizon. For his speculative selection, he digs down to South Africa, for a high risk play on mining firm, DRD Gold.
"My conservative pick for 2006 is Verizon (VZ NYSE). The telecom company recently acquired MCI and has a strategy that goes far beyond local phone service, which is what comes to mind when you mention Verizon to individual investors. There are many other aspects to Verizon's business including its wireless and optical strategy. The stock yields 5% and the company has A-rated balance sheet. The shares trade at 12 times earnings and the company shows positive revenue growth.
"This is a boring company and stock, but there is an excellent chance that boring and stable stocks are back in favor in 2006 with a flat yield curve that already suggests that there will be a decelerating economy in 2006. Verizon has been a ‘buy at 30, sell at 40’ story for a long time and even if it turns out to be the same in 2006, you still have a good chance here. Plus I like the fact that the average investor has very negative sentiment towards the telecom sector.
"My speculative pick—indeed, I would call it super aggressive— is DRD Gold (DROOY NASDAQ), previously known as Durban Rooodeport Deep, is a South African gold miner. It's become buy-the-laggards time in the precious metals sector. And when it comes to precious minerals stocks, the biggest laggards are the South African producers. The reason is simple: While gold bullion trades in US dollars, South African miners pay their costs in South African Rand.
"With the rand appreciating so much in the 2002-04 period, South African gold stocks faced a declining price of gold in rand terms and rising production costs, while gold rallied in US dollars. That bizarre situation is now over. South African miners with strong balance sheets are interesting buys, while companies in notably weaker financial condition, such as DRD Gold, are bound to come back. But DRD should only be purchased as a speculative play and not a core holding."