Chasing Value: 2011 Stock Picks -- Part 2

Picking up where we left off with Chasing Value: 2011 Stock Picks -- The Journey Begins lets check out Newcastle's price-to-earnings ratio, which is a very low 4.37, and the price-to-sales of 0.28. Theses figures are lower than any of the 11 stocks already under consideration. The third thing we looked at was dividend yield. Unfortunately it would be the lowest in that category also -- zero -- it does not pay one. It has in the past and may in the future, but I would not expect it in 2011.

That does not take Newcastle out of contention. Its one-year rise from $1.75 to today's $7.10 is a gain of 306% -- amazing!

I do not think it is reasonable to assume NCT is in line for a repeat performance of that magnitude in 2011, but if it only appreciates 5% as much we might see a return of over 18%. I would be surprised if the overall market will offer more than half that return over the next year, and if NCT appreciated another 50% in the coming year it would not shock me. This makes Newcastle a leading contender for the list.

In our first story I mentioned that EZCorp (EZPW) was on last year's list and was likely to be again. There is another stock from last year's list also mentioned in the first story and that is General Electric (GE). It has been under the cloud of its financial division for almost three years now, but like NCT it's getting its house in order. GE has also suffered because it sells products with long cycles that require major capital expenses, like water treatment plant equipment, jet engines, imaging equipment, and more that customers have deferred and this has postponed GE's recovery.

Since I posted the initial story, I took a slight detour to cover another subject and in dong so arrived at a decision about two stocks for 2011 based on another series, Chasing Value: Defense and Oil -- Part 4 Conclusion.

The first is Chevron (CVX) and the second brings back an underperformer from 2010, Raytheon (RTN).

In the past few months I have written about Noble Corp. (NE) as offering a value play, as it suffers through the mire of the offshore drilling industry obstacle course of government actions, transgressions of competitors, and a shaky global economy. This is another strong contender for 2011.

Finally, to round off today's total to 14 stocks I have to add Citigroup (C), my largest option play, after the federal government sold off its last shares, hauling in a $12 billion profit on the total sale of all shares.

Let us add two more metrics today, price-to-cash-flow (P/CF) and price-to-earnings-to-growth (PEG) and try and thin out the stock list before we examine any others stocks. The following are the P/CF ratios from best to worst.

• Citigroup (C) -- United States: -4.90
• General Electric (GE) -- United States 4.15
• China Life Insurance (LFC) -- China: 4.86
• Noble Corp. (NE) -- Switzerland: 5.32
• Telefonica (TEF) -- Spain: 5.45
• Newcastle Investments (NCT) -- United States: 5.59
• Royal Dutch Shell (RDS.A) -- The Netherlands: 6.33
• Novartis (NVS) -- Switzerland: 8.11
• Johnson & Johnson (JNJ) -- United States: 10.38
• Diageo (DEO) -- United Kingdom: 10.72
• Berkshire Hathaway (BRK.A and BRK.B) -- United States: 10.81
• Teva Pharmaceuticals (TEVA) -- Israel: 11.01
• EZCorp (EZPW) -- United States: 11.22
• Apple (AAPL) -- United States: 16.89

Only Apple has a P/CF beyond the market average. Retail and institutional investors have been paying up for this stock and in recent years have been rewarded. GE, China Life, Noble, Telefonica, Newcastle and Shell are all far lower than the market average, which stands closer to 10.0. Citigroup has not yet reached a rational number but is a contrarian bet to begin with.

Looking at the PEG ratios, where anything near 1.0 or lower is very good, 1.5 is acceptable and over 2.0 usually means look elsewhere:

• Citigroup: 0.47
• Newcastle Investments: 0.58
• Teva Pharmaceuticals: 0.64
• EZCorp: 0.73
• Apple: 0.84
• General Electric: 1.04
• Noble Corp.: 1.11
• China Life Insurance: 1.17
• Diageo: 1.53
• Novartis: 2.06
• Telefonica: 2.06
• Johnson & Johnson: 2.18
• Royal Dutch Shell: 2.35
• Berkshire Hathaway: 2.49

Newcastle and Citigroup by this metric are dirt cheap, as are several others. Based on what we have reviewed to date, I am going to cut Berkshire Hathaway, a conglomerate, in favor of last year's conglomerate, which I will keep on the list. I do think Berkshire will outperform the S&P in 2011. That's not a stretch, however. GE still has a lot of room to run just to get back to the level that "my pal Warren" has bet on with warrants he got pegged at $22.25 when he loaned the company several billion dollars 18 months ago.

Johnson & Johnson has appeared on numerous recommended lists this year, as it did last year and does almost every year. It is another conglomerate with good exposure internationally and will grow with the world, but not much more than the rest of the world. It has several very strong attributes. Among these are a great return on equity and very strong balance sheet, higher-than-average dividend, and like Berkshire is one of only four Triple-A rated companies, which makes it very safe. Safe will do wellm and for those re-entering the market, both are solid. I just think they will beat the S&P by a little when other stocks will beat by a lot.

I also will be cutting Shell in favor of Chevron based on my recent review, which simply comes down to recent pricing levels. Two months ago I preferred Shell and wrote about it, but today CVX seems better based on valuation.

Newcastle is very cheap and healing itself very fast as is Citigroup. I look forward to continued dramatic improvements in the coming year as in this past year and will include both on the 2011 picks list. This brings the number of stocks that have made the cut so far to five: Citigroup, Chevron, GE, Newcastle and Raytheon.

Sheldon Liber is registered architect and the CEO of Chasing Value ™ Asset Management, Inc., a small private investment company. He writes the columns Chasing Value™ and Serious Money. and is on twitter: ChasingValue Disclosure: He own shares and/or options of BRK.B, C, DEO, EZPW, GE, JNJ, NCT, NE, NVS, RDS.A, TEF.