On Dec 12, 2002, I penned a commentary for Dale Evans, Editor of CMS, on the topic of what 2003 would bring. I think it may be a good time to revisit this topic and to rub my hands over a crystal ball for what may be in store for 2004.
Below are my ten picks for 2003, as of Dec 2002. I calculated their market value on Jan 1, 2004 as a) a single investment of $1200 each on Jan 1, 2003, for a total investment of $12,000 and b) a dollar cost average investment of $100 a month each for a total investment of $12,000. Sharebuilder.com offers a tool called “What if I had invested” that helps calculate a dollar cost average return along with dividend reinvestment.
|Market Value||Market Value|
|Company||Symbol||$1200 1/1/03||$100 a Month|
|Air Products||APD||$1513 26.1%||$1470 22.5%|
|Cascade Natural Gas||CGC||$1372 14.3%||$1403 16.9%|
|Electronic Data Systems||EDS||$1600 33.4%||$1547 28.9%|
|Investors Financial||IFIN||$1635 36.3%||$1674 39.4%|
|Lowes||LOW||$1692 41.1%||$1483 23.7%|
|Mead Westvaco||MWV||$1488 24.1%||$1481 23.5%|
|Petroleum Resources||PEO||$1563 30.3%||$1484 23.7%|
|Philadelphia Suburban||PSC||$1643 36.9%||$1478 23.2%|
|Suez||SZE||$1383 15.3%||$1573 31.1%|
|Heineken||HINKY||$1172 -2.3%||$1258 4.8%|
|Total||$15,058 25.5%||$14,851 23.8%|
|S&P 500||SPY||$1484 23.7%||$1422 18.5%|
In 2003, there were down months and up months. By April, numerous stocks were trading lower than in Jan, creating an advantage for dollar cost averaging. With a strong finish over the last months of 2003, many monthly purchases produced a nice capital gain kicker. For example, Suez was underwater most of the year, but sprang back for a year-over-year modest increase. On the other hand, an investor who dollar cost averaged their investment in 2003 would have realized a substantially better gain. However, once stock prices rose above Jan 03 levels, dollar cost averaging lost its advantage.
With the DJIA at 10,450 and the S&P 500 at 1,111, stock bargains are hard to find. Overall, stock prices seem to already factor in an expansion in 2004 earnings. Few top quality companies trade at a 2004 PEG ratio of 1.0 or less. I am looking for a husky market for the first half of 2004 as year-over-year earnings comparison continues to be robust. However, current stock price valuations indicate investors are already banking on an adequate second half 2004 as well. I think a more defensive stance may be in order.
For 2004, I would add to investments in home improvement retailer Lowe’s; mutual fund back office service provider Investors Financial; closed-end energy mutual fund Petroleum Resources; and water utility Philadelphia Suburban.
I would hold investments and reinvest dividends in industrial gas producer Air Products; natural gas distributor Cascade Natural Gas; tech
services Electronic Data; and paper producer Mead Westvaco.
While I still like French utility Suez for its
I think Chicago Mercantile Exchange (CME), Omnicare (OCR), Southwest Water (SWWC), Great Lakes (GL), Havs Corp (HAVS), Brinks (BCO), and SEI Investments (SEIC) are worthy of serious investor investigation.
For 2004, my portfolio of Overlooked stocks would look like this:
Investors Financial Services (IFIN, Financial) is one of my favorite
companies. Well positioned to continue its 20%+ EPS growth, IFIN offers back
office services to the mutual fund industry. Lowes (LOW, Specialty
Retail) offers investors greater potential EPS growth than its big brother,
Home Depot (HD). The key to successful investing in the retail sector is
locating companies that are opening new stores at a fast clip. LOW is opening
stores faster than HD. While I am not usually a fan of mutual funds, closed-end
fund Petroleum Resources (PEO, Energy) has been around since before
Mr. Merrill met Mr. Lynch. PEO currently trades at a 2% discount to its portfolio
of oil stocks. While the discount has evaporated over the past 2 years, I
like the portfolio of conservative energy companies. Aqua America (WTR,
Water Utility) is the new name for Philadelphia Suburban (PSC) and is the largest US investor-owned water utility. You have to love the dramatic
consolidation going on in the
There are a few dividend paying stocks that don’t offer DRIPs, yet. Brink’s
(BCO, Industrial) is a company in transition. Management has restructured
from a coal producer to a security related firm. Strong earning growth going
forward should generate above average dividend growth. Chicago Mercantile Exchange (CME, Financial) recently went public. Management
of the Chicago Merc, the leading futures exchange in the
2004 should be an interesting year. With investor expectations
already high, and with their willingness to believe 2004 will
be a good year for business, returns over the next 12 months could
be more conservative. The key to overall stock gains will be
the performance of the
George Fisher, author of The StreetSmart Guide to Overlooked Stocks (McGraw Hill, 2002) and All About DRIPs and DSPs (McGraw Hill, 2001), Sagamore Beach, MA [email protected]
Copyright North Shore Associates 2004