Chasing Value: 2011 Stock Picks -- 5 of 11

One change is that this year I am going to start with last year's picks. I am not throwing them all out, because that too is not my style and not realistic. Besides there were some great picks that do not become less so just because the calendar turns a page. The following is last year's review: Chasing Value: 2010 Final Review -- Winers and Losers.

Here is last year's list: EZCorp (EZPW), Berkshire Hathaway (BRK.B), Home Depot (HD:), General Electric (GE), Williams Company (WMB), Grubb & Ellis (GBE), Archer Daniels Midland (ADM), Raytheon Company (RTN), Brasil Telecom (BTM), E-Trade 'Naked Put' (ETFC).

The following stocks are listed using the closing price set on December 31, 2010.

1) EZCorp (EZPW): $27.13, no dividend.
It was last year's big winner and the first company to be included for a third year. If I had to pick stocks for the next ten years, I probably would include EZcorp. I have written multiple stories about this company that owns hundreds of pawn shops and cash advance stores. It also makes personal loans and car loans. In addition to owning one of the largest chains in the United States, it has expanded through acquisitions, organic growth and partnerships to extend its operations to Mexico, Canada, Great Britain and Australia. The company currently operates 1006 stores worldwide. Over 100 new outlets are planned for this year.

Even with all its success, the metrics are still very reasonable. Perhaps that is because the company is still too small to get much attention from the largest investment interests. It is capitalized at 1.3 billion, and has very little debt. It has a P/E ratio of 14, which is expected to drop below 12 in the coming year as it is expanding faster than the price is appreciating. This has kept its PEG ratio at a low 0.75. If the stock was priced at a more realistic P/E multiple indicative of its market beating 20% growth rate the stock might be $40 now. However, I think that it will continue to grow, get ever increasing attention and easily be at $40 by the time 2011 comes to a close. I will be following it closely all year because I have already made some pretty bold statements about this stock, see: Chasing Value: EZCorp Better Than Apple, One Month Review

There would be no harm in holding Berkshire Hathaway or Home Depot this year and in the years to come. Both advanced last year about 20%. After that kind or performance my expectation is for them to fall in line with the market growth and little more.

2) General Electric (GE): $18.29, 3.62% yield.
GE had a good year and I expect it might even have a better year going forward. In some ways this conglomerate is a surrogate for BRK.A and HD. It is one of the stocks "my pal Warren" made a large bet on when things were at there worst. He loaned GE billions at a 10% fixed interest rate and holds warrants for the stock priced at $22.25. I consider this to be the best marker for where the stock might be in a year and I think buying the stock under this price exposes one to little risk. The dividend lends further support and that might even be increased.

GE still remains with considerable debt, but it also has considerable cash-flow and cash on hand sufficient to meet its obligations. In fact its price-to-cash-flow is less than half the market average at 4.53 and the same is true of the price-to-sales at 1.03. Besides the fiasco called GE Finance, GE was hurt by the fact that most of its income comes from things that fall into the category of major capital expenses. This is not something customers were looking to fund in the past three years. That is changing. It has dominant enterprises in the areas of energy, water purification and reclamation, turbine aircraft engines and emergency generators, health care and more. Customers will be coming back. It too has a low PEG ratio of 1.13.

Finally, as one of Buffett's more recent investments, I expect that this part of Berkshire will outperform the whole of it.

3) Chevron Corp (CVX): $91.25, 3.1% yield.
The stock has already run up since I posted Chasing Value: Defense and Oil -- Part 4 Conclusion, on December 17, when it closed at $88.49, I am sticking with it as a defensive position, that has both a solid dividend and little chance of going down when oil prices are going up this year. This spot was filled by Williams Company last year. I own WMB and I am keeping it, however, competition in the natural gas market is not likely to be as competitive or speculative as oil will be in 2011. The choice of Chevron does not entirely push out WMB because in 2010 CVX gained 49% of the Laurel Mountain Midstream, a system of more than 1,000 miles of gas gathering lines that it'll share with the Williams as mentioned by The Motley Fool that prefers Exxon Mobil (XOM). The oil companies are likely to rise in unison, but CVX has the higher yield, lower P/E ratio and much lower PEG ratio 0.50 vs 0.96.

4) Raytheon Company (RTN): $46.34, 3.19% yield.
This is the third stock that I am keeping in the portfolio. RTN was one of my losers last year but I happen to think Mr. Market has short changed this company. It too was discussed in my December 17 post, linked above. This company has a strong balance sheet, a higher than average yield, proven management and products that are in demand. I do not believe defense spending will be cut, although it may not be raised much either. North Korea may do enough saber rattling this year to support the entire sector from much more deterioration. The company may not need to do much to see some appreciation this year. Just returning to the mean might be enough for a healthy gain.

5) Newcastle Investments (NCT): $6.70, no dividend.
Three out of my first four picks are large cap dividend payers. This stock is more speculative and it is the comeback kid, since I bought in at 60 cents and saw it rise to a 52 week high of $7.10. Newcastle reported great results recently and I expect that to continue this year as the real estate and lending environment continue to heal themselves. NCT is both a CMBS lender and real estate investment company given up for dead, two years ago. In 2010 it saw 50% growth pushing the PEG ratio down to 0.62, meaning that the rapid stock price rise has not kept up with the growth and there is still value here.

Further evidence of this is exemplified by its current P/E of 4.65 and project P/E of 3.10. I must admit my ignorance (all too often), as someone that has so much experience investing in real estate and stocks, that I do not understand why the forward looking P/E is thought to be going down when it is already at such a low level. Are analysts anticipating another display of rapid growth that is not recognized by the market and thus pushing the P/E down? It seems to me that the P/E would go up as the stock regains its old glory. Last year I thought Grubb & Ellis would be all the rage, and it was through the first five months of the year more than doubling in price. This proved to be unsupportable and driven by more speculation than substance. This might reverse course this year, rising to new highs, but I will make the move from brokerage to ownership by this change.

The other six picks will be in my next post.

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, EZPW, GE, and NCT, .