What’s our strategy for this article? Study the top picks for this year’s second half from recognized authorities. Select one from each authority’s selections to assemble a portfolio engineered for 2012’s “back nine.” We are doing our homework since, despite the gruesome headlines, the right equities will surprise everyone and make money. Besides, sitting in nil yielding bank accounts or money market funds just defers the day when you’ll have to get back into the investment pool.
1. Pimco’s Bill Gross: Siemens (SI)
Barron’s, the financial weekly, twice a year convenes a roundtable of top flight investment professionals to opine on the market and offer up stock picks. Recently, the magazine reported on the panel’s midyear assessments. Bill Gross is one of the all-time great investors; his Pimco Total Return has become the largest mutual fund on the planet. Gross’ strategy for the current volatile period is to invest in “companies with safe, predictable cash flows that can diversify sales globally and thus cushion profits” that pay healthy dividends. Among the stocks cited was Siemens; he likened it to the GE of Europe and saw it as sure rebounder when Europe returns to health. While you wait enjoy the near 5% dividend.
2. T Rowe Price’s Brian Rogers: Thermo Fisher Scientific (TMO)
Another Barron’s midyear roundtable participant was Brian Rogers, the Chairman and Chief Investment Officer of T. Rowe Price. “T. Rowe” is a Baltimore based fund company with $555 billion assets under management. Rogers has managed its Equity Income fund for 27 years, during the last 15 of which it’s outperformed the S&P by more than 1% on average annually. What’s his investment approach? “[W]e like good companies with low valuations, good dividend yields, and good dividend-growth prospects.” Thermo is a global leader in scientific instruments, laboratory equipment, and diagnostic products. It’s deemed timely due to its low price to earnings ratio (10.5), recent solid first quarter earnings, and ongoing stock buyback program.
3. Dogs of the Dow: JP Morgan (JPM)
The Dogs of the Dow are a group of ten stocks not chosen by an investment professional but rather mechanically assembled. The criteria are simple: It’s the ten members of the Dow 30 with the highest dividend yields, whether the outsized yields are due to recent payout hikes or a decline in the stock prices. Of the current Dogs we like JPMorgan. This preeminent banking concern came out of the financial crisis with high praise for its leadership and risk management prowess. More recently it confessed to a $2 billion plus trading loss, causing many to lose confidence. Yet, since the beginning of May the stock has lost over $50 billion in market cap, suggesting the sell off was a gross overreaction. Here, too, enjoy an above average dividend of 3.8% while you wait for the dust to settle.
4. Fidelity Investments: Merck (MRK)
Fidelity Investments does not produce a top ten list per se. However, insight as to what would appear on such a list can be gleaned by reviewing the top ten holdings of some of its funds. And what better fund to review than the Fidelity Leveraged Company Stock Fund (FLVCX), which has outperformed all other Fidelity diversified domestic equity funds over the last 10 years, with an average annualized return of 14%, nearly 10% per year in excess of the return on the S&P 500. Among its recent top ten holdings is Merck (MRK). This healthcare giant, in addition to boasting a robust 4.2% dividend (which makes it a Dow Dog), trades at an inexpensive 11 times earnings. Its Schering Plough acquisition is serving it well, providing additional drugs to market plus cost reduction opportunities.
5. Warren Buffett: Conoco Phillips (COP)
Legendary investor Warren Buffett never issues a top ten list of investments. After all, he boasts that a stock’s proper holding period is a lifetime. Nevertheless, insight as to what he might include on such a list is found by examining his current top holdings. Of those we like Conoco, this country’s largest independent energy exploration and production outfit. Its stock is depressed amid soggy energy prices and fears of global recession; however, the company is focused on boosting shareholder returns by strategically selling assets and using the cash to buy back stock, fund its generous near 5% dividend, and pay down debt. It recently spun out its refining operations as Phillips 66 (PSX), in the process receiving $6 billion, which it can put to similar good use.
6. Value Line: Northrup Grumman (NOC)
Well known stock researcher Value Line includes Northrup Grumman, a diversified high tech defense contractor, in its model portfolio of “Stocks With Above-Average Dividend Yields.” It’s attractive. Per Value Line, the stock is “undervalued,” trading at a mere 8 times earnings, a discount to the current market and its historic multiple. Investors are being generously rewarded with a 3.5% yield following the recent 10% dividend hike. This low debt company is also rapidly retiring its shares, another shareholder friendly strategy. Northrup does 90% of its business with the US Government, of some concern as austerity initiatives target non-essential military spending. However, we believe some of those fears are overblown and or discounted in the low stock price.
7. Kiplinger’s: Oracle (ORCL)
The popular consumer finance periodical Kiplinger’s recent article on where to invest in 2012’s second half cited Oracle as a good opportunity, praising it as an example of “cash-rich, large-company stalwarts with muscular balance sheets” and thus a good stock selection. We agree. This software powerhouse has astutely spent more than $38 billion in acquisitions, building the business steadily. While some fear the company lags an industry trend towards cloud computing, the reality is its software users find it extremely expensive to exit its products. So, it’s believed that the company will be able to retain its customers as it and its customer’s transition to new technology paradigms. In the meantime, we like its prodigious cash generation, minimal debt and low price to earnings ratio of 11.
8. Standard & Poor’s: Caterpillar (CAT)
Famed securities analyst Standard & Poor’s ranks Caterpillar number one among the 14 stocks that currently make its “A+ Stocks with High Projected Growth” list. To make the list, a stock has to have a “Quality Ranking” of A+, which requires 10 years of “superior earnings-per-share and dividend growth and stability.” Its research indicates that’s a winning group relative to the overall market. That group is then further screened to require that expected growth is at least 12% annually over the next five years. We particularly like Caterpillar’s dominant market share of the earth moving business. This appears to be a fine entry point, with the current quote down 1/3 from its recent high in February. The 2.5% dividend is more generous than the average S&P company.
9. Morningstar: Novartis (NVS)
Popular online investment analyst Morningstar assigns a rating of one to five stars for nearly every stock based on investment merit. But, some stocks entail greater uncertainty as to their prospects than others. So, just in time for 2012’s second half it screened for four or five star stocks coupled with below average uncertainty. Novartis is a particular standout on the list. Think about it as the Johnson & Johnson (JNJ) of Europe, but at a Pfizer (PFE) price. It’s like J&J because only 52% of its portfolio is proprietary drugs; its businesses also include generic drugs (its Sandoz being the second largest player), eye care (Alcon), consumer staples (Gerber), and vaccines (Chiron). Despite being involved in higher valued areas like eye care and consumer staples, it carries a Pfizer-like low valuation, perhaps because of its European location notwithstanding most of its business is outside of Europe. We like NVS’ 4.5% dividend.
10. Smart Money: MetLife (MET)
Dow Jones owned Smart Money has been a trusted financial news magazine and website for years. It has a number of intelligently designed stock screens allowing rapid filtering for stocks with desired qualities. Under its “Bargain Growth” screen, stocks must show both positive earnings growth and recently reported earnings surpassing analysts’ expectations. Of those stocks uncovered, MetLife is particularly attractive. It’s the largest life insurer in the United States, and recent acquisitions have dramatically expanded its footprint in Asia. The valuation, too, is a plus, as the stock is a third lower than a year ago, sports an above average 2.5% dividend, and trades at just half its book value, with a forward price to earnings ratio of less than 5.
By David G. Dietze, JD, CFA, CFP™
Founder, President and Chief Investment Strategist
Point View Wealth Management, Inc.
June 28, 2012