Anybody have capital gains to show this year? I didn't think so. Not unless you were shorting the market, and in particular financials. I got clobbered with everyone else. There were not many places to hide. Picking winners was like guessing where each piece of debris would land after the tornado moved through town.
The average crystal ball is looking quite foggy about now, nevertheless I have rummaged throughout the stock market to select nine stocks that I think offer more reward than risk. The market is priced for the worst in so many cases that I think the list could have included 50 companies without too much trouble.
In 2007 and 2008 I owned some but not all of the picks for the year. This year I own all of the stocks and they were all acquired in the latter part of the fourth quarter for a new portfolio.
Among the nine stocks seven pay dividends. I have indicated my starting cost (followed by the closing price on December 30, 2008) and the yield at my buy-in. The average yield for the nine stocks is 4.82%. If any of these companies changes their payout during the course of the year I will report that and make the adjustment in the following quarter.
- American Eagle Outfitters (NYSE: AEO) $8.99 ($9.13) -- 4.39%
- Anadarko Petroleum (NYSE: APC) $34.00 ($37.95) -- 0.97%
- Anglo American ADR (NASDAQ: AAUK) $10.99 ($11.37) -- 6.07%
- Annaly Capital Management (NYSE: NLY) $14.80 ($15.29) -- 15.01%
- Diageo plc (NYSE: DEO) $52.00 ($55.65) -- 4.67%
- EZCorp Inc. (NASDAQ: EZPW) $14.46 ($14.81) None
- General Electric Company (NYSE: GE) $16.00 ($15.82) -- 7.65%
- Wells Fargo & Company (NYSE: WFC) $27.00 ($28.80) -- 4.63%
I have written about many of these companies before with the exception of AEO, so I will summarize and refer you to other stories to make the case in more detail.
American Eagle Outfitters: As one of my last 2008 picks I did not get a chance to write a post on AEO. It is no secret that retailers have been devastated this year as consumer spending overall is down and numerous bankruptcies have evidenced how bad things have been.
AEO has not been immune and the stock is off it's high of $23.84 losing two thirds its value. I think it reflects the overall market and not its own present or future. This company has no long term debt, has 13% profit margins and pays a higher than average dividend yield. Add to these factors a low P/E around 7, a modest P/B of 1.65, and even more modest P/S of 1.5. There is nothing modest about AEO's ROA and ROIC each around 29%. Yes these are trailing figures, but it is the end of the year so they are 2008 figures! I think this stock is a clear value, will continue to expand into the void left by others and at a capitalization of under $2 billion could be a takeover target.
Anadarko Petroleum: Oil stocks are down with falling oil prices creating an opportunity to buy on the cheap which we never thought we would see again. Long term global dependence on oil has not shifted that much so I expect to be paying double at the pump again. Anadarko has a lot going for it with 50% of its reserves in North America any global crises might exaggerate its worth. It is paying a modest dividend but it is working off debt from acquisitions, and as it does, it may become one itself. It is trading at a slight premium to book value at 1.2 times while it's net earnings and ROE hover around 24%. See: Chasing Value: Oil & Booze -- Anadarko & Diageo
Anglo American: The worlds fourth largest diversified mining company is down almost 75% with commodity prices, and I believe that now is a good time to take advantage of an unusual buying opportunity. AAUK owns a broad range of precious and basic materials including diamonds, gold, platinum, silver, copper, coal, wood, gas and more. It is paying a solid dividend and it might be an attractive acquisition target at current prices. See: Chasing Value: Inflation protection with gold & platinum (AAUK) and Chasing Value: Anglo American on sale
Annaly Capital Management: When the federal government took over "Fannie and Freddie" in September it practically guaranteed the success of this REIT that pays out 90% of its earnings -- a whopping dividend -- that would bring joy to any retirement account. See: Chasing Value: Annaly Capital Mgmt -- from watch list to buy
Diageo: If there is anything that is recession proof it would have to be alcohol. It seems clear that rising unemployment is going to fill church pews and bar stools and DEO is the largest player in the world any way you measure it. This is another stock with a healthy dividend that is not in jeopardy. It has 19% profit margins and a staggering 41% ROE. See: Chasing Value: Diageo (DEO) -- Drink up?
EZCorp: This small cap company is growing rapidly organically and by acquisition to consolidate an industry in great need of improvement, pawn shops, loans and cash advances. I believe because of the need for the services it provides, the growing amount of unemployment and the tight lending environment it is likely to beat the overall market very easily next year. See: Chasing Value: Jobs losses could equal pawn shop gains -- CSH, EZPW
General Electric: After watching GE for years... and then watching this AAA rated (still) microcosm of the world economy lose two thirds of its value, I decided It was time to buy it. I was stimulated by the dividend, gaining a little comfort that Buffett looked at the books before he sunk $3 billion into it, and that despite its financial woes it was still a diversified industrial with interests in infrastructure, health-care, consumer goods and more that were hit hard with everything else. I feel that a stabilized GE is worth double even in a slow economy three years from now, and that is a hefty ROIC for me. See: Chasing Value: GE -- the water & power company
Intuitive Surgical: There is not much more I can say about this robotic surgery equipment company or the stock that I have owned and praised for years. I think it is selling for a ridiculous bargain basement price even though top and bottom line growth are still very strong. They own the primary patents for the hardware, software, replacement parts, and maintain service contracts for additional recurring revenue.
This company is a monster -- it has no short term debt or long term debt and maintains a balance sheet with hundreds of millions of dollars on reserve. Then consider 24% profit margins, and 20% ROE, ROA, and ROIC across the board. It has a moat around it a mile wide AND A MILE DEEP! See most recent post Chasing Value: Feds single source Intuitive Surgical and earlier in the summer when it was 100% higher Chasing Value: Intuitive Surgical beat the street AGAIN!
Wells Fargo: This is one of the survivors and the only AAA rated bank left, even with considerable debt. It has a great dividend, proven management team, and is growing by acquisitions the largest of which was Wachovia (NYSE: WB) and organically as well. See: Chasing Value: Wells Fargo may look like a steal in 12 months
This coming year I will be reviewing the progress of this portfolio quarterly instead of monthly. I have buy orders in on all of these stocks that might allow me to reduce my average cost in a meaningful way. However, I will not change the starting point. As I have done in the past I will track the Dow Jones Industrial Average which closed yesterday at 8,668.39, the NASDAQ Composite which closed yesterday at 1,550.70, and the S & P 500 Index which closed yesterday at 890.64.
This is my last post for the year so I wish all of the BloggingStocks family and our readers a Healthy, Happy and Prosperous New Year!
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of all nine stocks as indicated.