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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.
Four contenders have been considered so far: American Eagle Outfitters (AEO), Anadarko Petroleum (APC), Anglo American ADR (AAUKY) and Diageo plc (DEO).
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.
As the 2010 picks are solidified, additional details will be discussed for each.
Contender
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.
Contender
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.
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Reader Comments (Page 1 of 1)
11-13-2009 @ 7:02PM
Scott said...
Can you explain the NLY dividend? According to yahoo finance the yield is 15.40% today. Is this yield specific to NLY, or NLY preferred A or preferred B? Yesterday NLY accounced their dividend saying " cash dividend of $0.492188 per share of Series A Preferred Stock" and "cash dividend of $0.375 per share of Series B Preferred Stock". Neither one of those add up to a yield of $2.76/15.40%. So which one do you buy to earn a dividend yield of 15.40%? Thanks for your response.
11-15-2009 @ 2:18PM
Sheldon L said...
Scott,
As a general rule preferred shares are issued by a company with a stable, often higher yield, then the regular shares, but for that they offer no stock appreciation. They refer to stock shares that have "preferential rights" to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders.
The Series A pay a 7.875% yield. The Series B pay 6%.
The higher yielding NLY "common" shares pay the higher yield I refer to and are traded on the NYSE. Neither the share price or yield are fixed.
You should study the subject, and seek out an experienced adviser, before you risk your money.
11-15-2009 @ 8:51PM
Beltway Greg said...
Sheldon, you old rattlesnake wrangler, undoubtedly you're one of the few sane voices in the investing blogosphere. I read your post concerning Dow 10,000 and while I agree that it is nothing but a number and taken in terms of inflation lower than 10K on a constant dollar basis I'm a bit
worried. My guess is that we have about 8-10 months to go in the current bull market. Sometime in the next year the Fed is going to pull the rug out from under us. Taken in that light, stocks which are either shooting the lights out in terms of growth or have a healthy dividend will thrive and survive. The dividend stocks will simply march in place and the growth stocks will outperform but not by much. The rally that we've had isn't really all that remarkable because stocks should've never fallen to the levels that they did. I think we're about where we should be and if earnings continue to beat and holiday shoppers
pack the malls we could see dow 11,000. (My initial prediction for this year was 9400) I think more money might be made shorting this coming year. Amazon is ridiculously
over priced. It is going to be hard for any stock to fight the tape and with the low volumes and investor bearishness any perceived danger could be met with waves of selling. We could see 8K but not much lower because stocks are not absurdly priced from a historical perspective. However, all bets are off if we can begin to create meaningful job growth. Then we'll see some sustainability. Another wild card? China. Call me crazy but I don't trust their economic numbers. I was reading a report that suggested that the books are cooked, malls, are empty, and gas consumption is stable despite a dramatic uptick in the number of automoibile sales.
Anywho, is anybody up for, in the words of Joni Mitchell, "Paving paradise and putting up a parking lot?" For growth we need consumers to consume and we must do something about the debt. My bet? Despite what Tim G. says we're not gunning for a strong dollar and we surreptitiously praying for inflation so that we can inflate our way out of this mess. The real bull market will start in about 4 years. Till then it's back to 1980. In that light I think your picks are great but with the weakening of the dollar we'll see strength in commodities.
And as usual I hope I'm wrong.
11-15-2009 @ 9:18PM
Sheldon L said...
BG,
Always interesting to ponder over your comments. I agree with most of your sentiment.
*If the Fed raises rates in the latter half of 2010 it will temper or stall the market. But they should do it.
*I agree that Amazon at a P/E of 50 is just plain silly.
*The Chinese not only have a "command" economy, they may also have command bookkeeping -- but it's not universal.
*I think it is no secret that DC quick-steppers speak with fork tongue when they chat up a strong dollar and do everything they can to sink it. That's how they intend to get Americans to work for Chinese wages.
11-16-2009 @ 10:29AM
Beltway Greg said...
To quote Dave Chappelle as Rick James, "The milk has gone sour."
Shorted AMZN at $133.33 will cover a buck up or a buck down.
11-17-2009 @ 9:59PM
Irish Will said...
I have owned Annaly NLY for some time and want to hold as long as possible for the great divs.
I was cautioned to keep an eye on the 'spread' -but I don't know what specific indicators to look at either on the borrowing or lending side or where to look? any assistance would be helpful.
11-17-2009 @ 10:44PM
Sheldon L said...
Irish Will:
Net Interest Rate Spread refers to the difference between a company's cost of borrowing and the interest rate it can earn on its money. For example, if a company is able to borrow at 2% interest and is able to earn 3% interest, its interest rate spread is the difference between the two: 1%, or 100 basis points.
Refer to: http://www.wikinvest.com/wiki/Interest_rate_spreads