Bernie's Best Bets

11/01/2002 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Traders and investors alike have come to eagerly anticipate the top stock picks issued by Bernie Schaeffer at a special panel during each Money Show. He began this practice in November 2001 in Las Vegas and his picks from that show are up 9.4% versus a 3.3% decline in the S&P 500. The five stocks chosen at The Florida Money Show in February 2002 now show an average gain of 16.6%, versus a 1.2% decline in the S&P. Here are his new picks from The New York Money Show.

“Why don’t I believe that October 10, 2002 marked ‘the bottom?’ For reasons very similar to why I disbelieved the bottom in September 2001 and July 2002. Way too much hope, way too high earnings and growth estimates, way too many risks to the economy, combined with way too ugly technicals. Might I be wrong, and this was the bottom and we're off to the races in a new bull market? Yes. In this regard, watch the 9000 level on the Dow industrial average. There is not only heavy price resistance there, but it is also the site of the 80-month moving average. If this level is taken out decisively, the bear market may be over or at least on hiatus.

“We have two bullish stock picks. United Parcel Service (UPS NYSE) is on track for 13% earnings growth. It has been a major winner from the explosive growth in e-commerce. Technically, the stock gained 16% in 2002 in a very weak market and its relative strength versus the S&P is near an all-time high. From a sentiment standpoint, short interest of 35 million shares is more than ten times daily volume and the put-to-call ratio is higher than 97% of its readings over the past year.

Starbucks (SBUX NASDAQ) saw its June quarter net income rise by 20% and its September revenues increase by 26%. Technically, the stock has outperformed the S&P by more than 200% since 1999 and by more than 50% in 2002. Indeed, the stock gained 20% in 2002 despite a very weak market. Short interest of 12 million shares is 3.5 times daily volume and recent feature magazine articles have questioned the company’s growth potential. From a contrary standpoint, we view this as bullish.

“We also offer a trio of bearish stock picks. Wal-Mart (WMT NYSE) has seen same-store sales growth slow considerably in recent months and the stock sports a very aggressive p/e ratio of 35. According to Zacks, 18 of 21 analysts rate WMT a buy; we view this as overly-optimistic. Merrill Lynch (MER NYSE) has seen its earnings under siege in the bear market and scandal-rocked brokerage business. The stock is in a serious bear market and has steadily under performed the S&P since January 2001. Microsoft (MSFT NASDAQ) sports a $260 billion market cap and a 35 p/e ratio in a slow growth environment, which makes the stock vulnerable to decline. Per Zacks, 23 of 25 analysts who cover the stock rate it a buy. We consider this bullishness a negative. There have been seven separate bullish magazine cover stories on MSFT over the past year, indicating an excess of bullish sentiment.”

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