Goldman, Intel Are on My Top 10 List for 2011: John Dorfman
As investors make their resolutions for 2011, many should resolve to take on more risk.
Seared by losses in 2008, millions of investors have slashed their stock allocations, preferring the relative safety of bonds or cash. This represents a triumph of fear over experience.
History shows that the stock market is the right place to keep a percentage of your money. For most people, I recommend 60 percent of liquid assets. In the 30 years from 1980 through 2009, the compound average annual return in U.S. stocks was 11 percent. So far this year the Standard & Poor’s 500 Index (SPX) is up 15 percent, including dividends.
Yes, 2008 was awful. And no, you shouldn’t have money in the market unless you can afford to risk its loss. Yet owning a piece of American businesses has been a wise strategy, long-run. In that spirit, here are my 10 favorite stocks for the coming year.
I expect the information-technology sector to have a good year in 2011 as the economy picks up, so I will start with two technology companies. One is Western Digital Corp. (WDC), which I believe is undervalued at six times earnings. The Lake Forest, California, company is the world’s second-largest maker of computer disk drives in terms of revenue. In its last fiscal year, which ended in June, Western Digital increased its earnings to $1.4 billion from $470 million the year before.
Cues From Management
The other tech company I like is Intel Corp. (INTC) This year nine Intel insiders have bought their company’s shares. In addition, Intel raised its dividend six times in the past five years. Both of these are indicators that management believes better times are ahead.
I also have two selections in the energy industry. Transocean Ltd. (RIG), with headquarters in Vernier, Switzerland, appeals to me as a leader in deep-water drilling. The stock took a whack in 2010 because of the Gulf of Mexico oil spill; it owned the rig that blew up and sank. Its 16 percent decline this year sets it up for a rebound in 2011, I believe. The stock sells for only 10 times earnings.
GT Solar International Inc., based in Merrimack, New Hampshire, has had a good run this year, up about 62 percent. Yet it sells for only 10 times earnings, and I believe there is room for further gains. The company makes furnaces that melt and purify silicon for use in solar panels. More recently it has developed furnaces for making synthetic sapphires used in light-emitting diodes. The company is debt-free.
Scorned, Now Cheap
In the financial sphere, my choice is New York-based Goldman Sachs Group Inc. (GS) The investment bank has been vilified for betting against a mortgage security it created, for high-speed trading and for paying its executives handsomely. These criticisms have helped to whittle Goldman’s stock price down to about $168, which is less than nine times earnings. That’s a low valuation for a talent-rich company.
I like several of the big drug companies, notably Johnson & Johnson. (JNJ) The New Brunswick, New Jersey, company has increased its dividend five times in the past five years. Its stock, which has sold for a median of 18 times earnings the past decade, currently fetches only 13 times earnings.
I think owning some Chinese stocks is desirable for U.S. investors. China’s economy is currently one of the fastest-growing in the world. Its budget is in better shape than ours in the U.S., and its population is younger.
One Chinese company I like is China Advanced Construction Materials Group Inc. (CADC), which produces concrete and provides technical advice for large development and infrastructure projects such as high-speed railroad beds. The company has headquarters in Beijing, but its stock trades on the Nasdaq market in the U.S. It sells for only four times earnings.
Mantech International Corp. (MANT), located in Fairfax, Virginia, provides information-technology services for the government, especially the military and intelligence agencies. In a world of terrorist threats, this seems a promising niche. The stock has lagged behind the market this year, falling about 14 percent. At about $42, down from a high of more than $61 in 2008, I think it is a good rebound candidate.
Sparton Corp. (SPA) is a micro-cap (market value $84 million) company based in Schaumburg, Illinois. I like it as a restructuring play. The company has three divisions manufacturing sonic buoys for the Navy, medical equipment (mainly for in-vitro fertilization) and electronics. I think the latter division could be improved and then sold, providing cash to fuel the growth of the first two, which are more profitable.
Riskiest Stock Pick
Rounding out my list is a risky pick, Amedisys Inc. (AMED) The Baton Rouge, Louisiana-based home-nursing company is under investigation by the U.S. Justice Department and two other agencies on suspicion that it overcharged Medicare. The likely outcome in my opinion is an out-of-court settlement. It’s worth remembering that without home nursing for elderly patients, many would be hospitalized, an unpleasant and costly alternative.
Some perspective: Before investing in stocks, you should have the equivalent of six months’ salary in a savings account, adequate health insurance and life insurance if you have dependents.
Disclosure note: Personally and for clients, I own all 10 stocks discussed in this week’s column.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
To contact the writer of this column: John Dorfman at firstname.lastname@example.org
To contact the editor responsible for this column: James Greiff at email@example.com