Kiplinger’s July 2006 issue included investment advice from seven top professionals. Here are some highlights of their stock picks:
1. Randolph Raid Younes from Julius Baer International Fund (17% annualized return) looks at international stocks that he can hold for five to ten years. His picks included Homex Development (HXM), Mexico’s leading homebuilder. He likes the company because the Mexican government is providing subsidized loans for lower to middle-class home buyers. There is an “acute” housing shortage in Mexico; thus, he expects the company to grow at least 15% annually. He also likes the cement industry because the 10 largest suppliers own 55% of the market. His favorite in that group is France’s Lafarge (LR). Another very concentrated industry is the liquor industry where four global companies control the market. In this industry, Younes favorite is Diageo, the British company that makes Smirnoff’s Vodka and Johnnie Walker. (DEO) He had an interesting take on this stock based on the aging of the population. “As people age, they tend to switch to hard liquor,” thus, the best company in that area will have the best growth.
2. Joel Greenblatt is the founder of Gotham Capital (40% annualized returns). His book, “The Little Book that Beats the Market,” discusses a “magic” formula for stock picks. The formula looks for companies “with high returns on capital and high earnings yields,” which essentially allows investors to find high returns in undervalued stocks. His top picks: American Express (AXP) which Greenblatt believes will grow 12-15% for a while making the stock trade at $75-$80.00 within the next two years. (As of August 30, 2006, it was trading at $52.48). Greenblatt also likes Autozone (AZO) which he thinks will be up to $140.00 per share in by August 2008 (as of August 30, 2006, the stock is at $89.46
3. Bruce Berkowitz, of Fairholme fund (15% annualized returns) looks at a company’s cash flow when deciding where to invest money. Thus, he analyzes a companies earnings and depreciation minus its capital outlays. He also looks for outstanding managers. His picks include EchoStar Communications (DISH) which began to generate cash flow last years and an oil and gas stock: Canadian Natural Resources (CNQ) which has enough large-scale development projects in the works that it could “double it oil production within six years.” Berkowitz cautions investors in this stock to be patient – it is not a short-term growth stock.
4. John Buckingham of the Al Frank fund (16% annualized returns) likes “cheap” stocks. He looks for a bargain mainly in value stocks but if he finds cheap growth stocks or tech stocks, he will buy them also. Thus, he recommends American Software (AMSWA) as an example of an “overlooked, cash-rich tech stock.” Because he is looking for bargains, Buckingham likes to find stocks that are out of favor. One such stock is D.R. Horton (DHI) whose profits have grown for the past 28 years but whose stock prices have fallen due to pessimism over the housing market. Thus, it trades at only a 6 P.E. making it a bargain under anyone’s definition. (As of August 30, 2006, it was trading at a 4.6 multiple). Buckingham also recommends Lyondell Chemical (LYO). Why? Others are running from this stock because oil prices are causing rising prices for chemical manufacturers. The company also had an adverse ruling in a lead paint case, so investors have fled – Buckingham sees this as a buying opportunity.
5. Nancy Prial of Managers AMG Essex Small/Micro Cap Growth (anywhere from 14% - 66% returns in the four years the fund has been in existence) likes to invest in small companies with values between $50 million and $1.5 billion and to find the good companies earlier than other investors. Her picks include Blackboard (BBBB) that is “the largest maker of Web-based educational software.” Many universities are signing up for its services quickly making it a “must-have” for universities. Sales growth for 2006 is predicted to be between 23 & 26%. A second stock that Prial likes is Christopher & Banks (CBK), a retailer that caters to woman over 40. Although it had slow sales, the company has just gotten new management that is focusing on its product lines. Prial also likes a much less sexy stock: Bucyrus International (BUCY) that makes excavation equipment for mining. Since there is a strong demand for commodities lately, the company is seeing a renewed growth.
6. Don Hodges of the Hodge’s fund (19% annualized returns) likes to “buy companies with improving earnings growth,” before other investors see that growth. He likes two drilling companies: Ensco International (ESV) and Transocean (RIG) although both have “skyrocketed” in the past two years. He thinks that there is a shortage of drilling rigs giving these companies great potential for growth. Like Younes, Hodges is fond of a cement maker, but his pick is Texas Industries (TXI). Although a feared housing slump may create lesser demand for cement, Hodges thinks the housing slump will be offset by the greater demand for road and public works projects. He and other analysts predict a profit growth of 38% by the end of the fiscal year in May 2007.
7. Finally, the last pro, Ken Heebner of CGM Focus (17% annualized return), looks for stocks that are “poised for takeoff” often based on sector and trades as need be to get rid of stocks that disappoint. Interestingly, he refused to discuss his current investment strategy with Kiplinger’s which had to figure it out based on the fund’s holdings at the end of 2005 (the last report). Thus, whether these picks are really Heebner’s Hot Picks or not is left to debate. Kiplinger’s claimed that he would like Phelps Dodge (PD), a copper producer, SunCor Energy (SU), an oil company and Station Casinos (STN), a company that owns eight non-strip casinos in Vegas catering to the non-tourist Las Vegas locals.
While there is no
common thread here, it seems that many of the big players like natural
resources and development type companies such as energy and copper and the
companies that can get the resources out of the ground and into the hands of
the consumer. Whatever your
strategy, the advice from this article could get you thinking about some
potentially worthwhile stocks.