The clock is ticking away the time before the year ends and I have only begun to sort out the possibilities. In Part 1 of this series, I discussed breaking up my potential picks into three categories: contender, on the fence, and out of the running until the 10 stocks have been identified.
Six more are included in today's review: EZCorp Inc. (EZPW), General Electric Company (GE), Wells Fargo & Company (WFC), Annaly Capital Management ( NLY), Intuitive Surgical Inc (ISRG) plus Berkshire Hathaway (BRK.B). These include the remaining five from 2009 and one more familiar to most investors.
Berkshire Hathaway (BRK.B) needs no introduction. The "B" shares have traded as high as $5,000 before tumbling on 'my pal Warren's' short term missteps. Today the stock is trading around $3,400. I bought shares this week counting on a strengthening housing market, insurance business, the fact that Berkshire hit a grand-slam investing in Goldman Sachs (GS) and may soon reap the rewards of a similar bet on General Electric. This is before you even consider the recent acquisition (accepted but not done) of the Burlington Northern Santa Fe (BNI), investment in a Chinese electric car company, or the fact that the company intends to split the shares 50:1 making it more accessible to retail investors and increasing its trading volume allowing BRK to replace BNI on the S&P index.
EZCorp Inc. (EZPW) has been a laggard this year even though it is profitable, has strong margins, almost no debt and is growing by acquisition and organically, both domestically and internationally. I thought clean pawn shops and convenient cash advance / check cashing businesses would be high fliers during these trying times; my fellow investors hardly took notice leaving it flat. If you were a fan of Peter Lynch, the very successful, retired manager of Fidelity's long running Magellan mutual fund, then you will appreciate that the PEG ratio for EZPW is 0.57. Lynch often discussed the attention he paid to the Price-to-Earnings-to-Growth instead of the P/E, which also happens to be low.
On the Fence
General Electric Company (GE) is always in the news, if not because of all its enterprises, then because it is prolific at issuing press releases and trying to manage its image closely. I thought the company might get its act together faster in 2009 when I included it in my picks but its entertainment division only recently seems to be sorting things out in the form of a spin-off with Comcast Corp (CMCSA); its health care division, like many had to operate under the shadow of Washington's whims, while the aerospace unit listened to the Boeing Company (BA) continue to delay its Dreamliner aircraft, hurting all of its suppliers.
At the same time that all this was up in the air (no pun intended) GE's real estate and financial enterprises were hemorrhaging. Having run down all the problems I remain optimistic that many of these issues will work themselves out -- just a year later. There is still a 2.7 yield, lower than average P/E under 15, low P/S of 0.90 and if they continue to whittle away at their gargantuan debt might surprise everyone beating the market by a large margin.
Out of the running
Annaly Capital Management (NLY) had a great run in 2009. Adding it's 16% yield to its 15% appreciation for a 31% return to date has clearly been rewarding to me and anyone that took my suggestion. Although I will be keeping the shares I own I do not envision 2010 offering the same opportunity. Interest rates in 2009 were very low and very constant, perfect for this trader of mortgage securities. It was also dirt cheap a year ago. Now I think it is fairly valued and if the interest rates rise toward the end of the year NLY's margins and dividend yield are likely to be affected too, which will in turn trim down the stock.
Intuitive Surgical Inc (ISRG) remains my largest holding and it is a frequent topic of discussion in my posts, However, it is up 128% to date and while I think it will be higher next year, a repeat performance is near impossible. Everything I ever liked about the company remains true, but it is fairly priced. It's a keeper, and one to watch in case the market becomes stupid again and drives it down to bargain prices once more, but that would surprise me.
Wells Fargo & Company (WFC) is one more winner I will keep but not include on the 2010 list. The reason has more to do with timing then the company or the stock. I think the stock will be double in the two to three year time-frame but by the end of next year the gains might just parallel the market. This is a great bank but there are still a lot of bugs to work out.
As I consider as many as 50 stocks, if you have an interest in a particular stock let me know and I may include it in future installments of this series.
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.