Thursday, July 26, 2007

I'm a kid. What stocks do you recommend I buy? (Momentum and Recovery Picks)

Reader's Question: I am a kid who wants to buy stock with the $8,000 I have in the bank. Will you give me some suggestions on what to buy?

First of all, congratulations on being fortunate enough to have a such a sizeable chunk of cash to invest at such a early age! Please do all that you can to learn how to invest it wisely and make it grow. Sustained success in investing your own capital can set you up for a more comfortable and fulfilling life in your many decades of adulthood ahead.

I will assume that you are investing to maximize your total return over at least the next five or ten years before you head off to college, and that your parents are providing you with food, clothing and shelter, so that you really do not have a need to generate much investment income. I think you are right in choosing to deploy virtually all of your investment capital into equities, since, as Wharton finance professor, Jeremy Siegel, is quick to point out, stocks have a robust track record of outperforming bonds and cash over the long haul.

I am going to suggest ten investment ideas and leave it up to you to “drill down” and do more research to decide which particular stocks to buy. Most of my selections are well-known brand names that you undoubtedly have heard of before. All of the names on my list are companies that I expect to grow substantially over the next decade. Half of the stocks (momentum plays) are currently trading at or near their 52-week highs, while the other half (recovery plays) are trading at large discounts to their prior peak prices. While I can not predict with any certainty whether the momentum plays or recovery plays will perform better over the next few years, I do expect that at least a few of the stocks on the list will very handily outperform market averages--your job is to make sure you pick the winners!

Rather than spreading your money thinly across many different stocks, I recommend that you establish a concentrated portfolio with no more than five positions. By owning only a few stocks, you will be more likely to find time between school and play to follow all of the relevant news about your stocks, read quarterly and annual financial reports, and listen to conference calls. Learning enough to develop a feel for what makes companies and products succeed and fail, and what drives stock prices higher and lower, will be a valuable hands-on educational experience that should serve you well throughout your life.

(Click on chart below to enlarge for easier viewing.)



Momentum Plays

Apple (AAPL): After Macintosh computers came the iPod and iTunes and now the iPhone. Apple has even dropped “Computer” from its corporate name to reflect the company’s success across a broader scope of consumer electronics. A visit to your local Apple store should reveal how the company’s attractively designed products are capturing increasing mind share and market share. Under founder Steve Jobs' leadership, this innovative company is still solidly in growth mode.

Google (GOOG): Google continues to thrive as the global leader of Internet search, despite ongoing efforts by Yahoo and others to capture eyeballs and search-related advertising revenue. Triple-digit year-on-year growth has slowed as Google has grown into its current $150 billion market capitalization, but the stock’s PEG ratio of 1.0 at today's price level is attractive. Expect Google to remain the search engine of choice in the U.S. and most countries for the foreseeable future.

Boeing (BA): The 787 Dreamliner is the first commercial airplane to be manufactured “in pieces” by an international consortium of partners, with final stage assembly at the Boeing factory outside of Seattle. As Dreamliner sales continue to ramp up, Boeing should reap the benefits of global collaboration and realize higher efficiency and profits for many years, likely outselling competitor Airbus in the process.

Toyota (TM): As the maker of reliable, high-quality cars and the popular, fuel-efficient, hybrid-engine Prius, Toyota has overtaken Ford (F) and is poised to edge past General Motors (GM) to capture the top spot in the ranking of automakers by number of vehicles sold worldwide. Innovative design, perfection of their just-in-time manufacturing process and the superb maintenance record of their cars will keep Toyota in the lead. At a forward P/E of 12 and a 14% discount from its 52-week high, Toyota’s shares are a relatively attractive buy at current price levels.

Chinese Stocks: China is the world’s most populous country (over 1.3 billion people vs. a U.S. population of 300 million) and has a booming economy expanding at the remarkable clip of 10% per year. A good way to achieve exposure to the Chinese stock market is through an index fund such as the iShares FTSE/Xinhua China 25 Index (FXI). The most heavily weighted companies in this index are mobile phone giant, China Mobile (CHL); oil and gas producer, Petrochina (PTR); and leading life insurer, China Life (LFC). For more adventurous investors, an interesting smaller company with current market capitalization just under $1 billion is Home Inns (HMIN), which currently has about 150 hotel properties under management and is still in the early stages of building out a major chain of economy hotels across China.

Recovery Plays

Yahoo (YHOO): As indicated by its depressed share price, Yahoo has in recent years performed poorly in search, social networking and other areas, behaving like a lumbering dinosaur around more nimble players including Google, MySpace and YouTube. On the other hand, despite its many missteps, Yahoo remains the world’s most trafficked website and the Internet game is still very much Yahoo’s to lose. Similar to how Amazon’s (AMZN) share price came roaring back from a 52-week low of $30 to a recent high of $89 following a series of unexpectedly strong earnings reports, Yahoo certainly has the potential to surprise on the upside over the months ahead.

Starbucks (SBUX): Starbucks’ 12,000 locations may seem like a lot but, if the Seattle area is an indication of the density of coffee shops this popular brand can support, plenty of expansion potential remains both in the U.S. and internationally. The recently announced deal with Hershey (HSY) to produce a Starbucks-branded premium chocolate should add incrementally to growth. Incidentally, speaking of partnering, Starbucks is no longer selling bottles of Jones Soda (JSDA) in their stores; however, this quirky Seattle soda maker may also be a good recovery play on the back of broader distribution of their unusually flavored sodas through big-name retailers including Wal-Mart (WMT), Target (TGT) and Safeway (SWY).

Whole Foods (WFMI): Whole Foods has led the organic food movement for years, contributing profoundly to the growing awareness across America of what a more healthful diet means. More recently, however, Wal-Mart, Safeway and other supermarket chains have jumped aboard the organic foods bandwagon, putting pressure on Whole Foods’ margins and threatening its leading position in organic food sales. Despite new competition, expect growth to continue as Whole Foods builds out more stores, including establishment of a new presence in the U.K. and Europe. More healthful eating is a long-term trend that won’t go away and, with Whole Foods trading at a forward P/E of 24, now may also be a good time to start nibbling on a few shares.

Homebuilders: A glance at headlines and price charts of major homebuilders--D H Horton (DHI), Pulte Homes (PHM), Lennar (LEN), Centex (CTX)--reveals just how much their stock prices have sagged since nationwide home prices and new construction peaked about a year and a half ago. It is important to note, however, that homebuilding is a cyclical industry and the bottom has to be somewhere, perhaps nearby. Patient investors willing to buy homebuilder stocks at today's prices and hold on over the years to come ought to realize substantial profits once the next real estate cycle gets underway.

HRPT Properties (HRP): Following the flurry of private-equity buyouts of REITs over the past year, culminating with Blackstone’s purchase of Equity Office Properties in February, REITs have generally fallen 20% to 30%. One of the office REITs, HRPT Properties, now trades well below book value (P/B = 0.86) and at a forward price-to-FFO ratio of just 8.1. This REIT is the cheapest way that I am aware of to buy real estate in today’s market. HRPT also offers a very attractive 8.5% dividend yield, which trounces current bank CD rates averaging around 5%.

(Disclosure: The author of this article has no current position in any of the stocks mentioned. However, if one of his sons decided to buy any of the stocks on the list, he would not raise a serious objection.)

10 Comments:

Blogger daniel said...

The beverage industry looks like it has some serious potential for big gains among the smaller compaines competing to gain market share away from Coke and Pepsi. Here is a report i found all about small-cap beverage stocks...

Investing in Beverage Stock

-Cheers!

10:15 AM, July 30, 2007  
Blogger undergroundman said...

Hi,

I'm another newbie investor. I like your picks, but I have a couple questions:

1. Where do you get the numbers to come up with a F P/E? Are you just pulling that forward P/E off a website or calculating it yourself? Do you really recommend a F P/E, or is a T P/E better?

2. I assume you're using the F P/E for the PEG. How did you calculate the earnings growth rate? Could you do an example?

Thanks.

12:54 AM, July 31, 2007  
Blogger Lloyd Sakazaki said...

Undergroundman: For Forward P/E, PEG, and Growth Estimates for Next 5 Years, have a look at the Key Statistics and Analyst Estimates pages of Yahoo Finance after entering a ticker symbol. Yahoo's ratios are usually correct; however, you can check them by calculating them yourself by using current stock price and analyst estimated earnings-per-share and growth rates. PEG is just P/E divided by estimated growth rate. I tend to focus more on forward P/E than current P/E, since expectations about to the future are what matter. --Lloyd

2:55 PM, July 31, 2007  
Blogger undergroundman said...

Yeah, I'm wondering how these growth rates are calculated. Is it just the total earnings now subtracted from the total previous earnings, divided by the previous earnings? Are they done using forward earnings estimates generally?

I don't trust analysts as far as I can throw them (being a small person, that is very little) and I've found that, au contraire, many of the numbers are wrong or crazy.

6:31 PM, July 31, 2007  
Blogger Lloyd Sakazaki said...

Undergroundman: The growth rates are analysts' "educated guesses" of the most likely future earnings for the companies they follow, based on their own modeling of industry and company fundamentals, which primarily boil down to income statement pro forma. Sure, the estimates may be biased but the consensus figures at least present an aggregate view of what professionals who are getting paid to follow companies and state their opinions think. You're right that often the best opportunities come from having a view that differs from what the analyst community thinks, and subsequently seeing quarterly earnings reports and the ensuing stock price movement come to validate your contrarian view. --Lloyd

8:24 AM, August 01, 2007  
Blogger kyleu said...

Both Whole Foods and Yahoo are in my favorite categories!

11:08 PM, August 07, 2007  
Anonymous Anonymous said...

I agree about cyclical market of home builders. I really like DHI and TOL. This market is bottoming and might be a good time to watch it more closely. DHI’s dividend yield of 3.70% is not the big but it is enough to keep me happy during these slow times. TOL’s executive said it will take some time to get back and see better numbers, but it should be sometime in 2008. Which is fine with me, that will be good time to sell and pay for long term gains, instead of short term (under 12 months). I am really trying to keep my investments for 12 months and up. It is hard these days when everyone wants to day trade. Patience and persistence is the key.

SundayInvestor.com

11:10 AM, August 27, 2007  
Anonymous Anonymous said...

I like how you mentioned Amazon's strong earnings showing resulting in the surge of stock prices. I believe that's directly related to the reselling activity from two products from Nintendo: Wii and DS Lite. During the holidays and well into this year Nintendo has been unable to produce enough of these units resulting in a large scale resale market on Amazon. With a healthy 15% commission fee, Amazon has been the direct beneficiary of this shortage.

Alas, all good things are destroyed by their own maker. Amazon announced today that they are limiting mass purchasing on Amazon (thus potentially its own reselling market share due to less resellers).

Look for a reversal of Amazon's profit reports and stock price in the coming quarters. Sell call or buy put now!

7:12 PM, September 04, 2007  
Blogger Business Plan Writers said...

Hi, your idea for writing article sounds delightful, it’s very much useful for beginners. It provides unique information for basic article writer and Business Plan Writers really appreciate what you just shared with us.

1:16 AM, March 30, 2012  
Anonymous www.encontactos.com said...

Well, I don't really think it may have success.

1:02 AM, June 05, 2012  

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