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 US water exposure, a replacement selection could be an option. Long-term, stable earnings offered by consumer focused beer producer Heineken should reward investors; however, there may be more exciting places to invest.
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 US water sector. PSC is growing faster than its competitors using an aggressive municipal water district acquisition strategy. Omnicare (OCR Healthcare) is the leading distributor of pharmaceuticals to the nursing home and long-term care facilities. Management continues to expand its market by acquisitions of small, regional competitors, and its patent count is growing. While its stock experienced a great run in over the past two years, the company’s growth is not over. Southwest Water (SWWC, Utility) continues to reward long-term shareholders. SWWC offers an efficient outsourced metering service to municipal water districts, and this opportunity should continue to expand, fueling earnings and dividend growth.
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 U.S. , decided to transform from a non-profit member-owned company to for-profit investor-owned firm. Management has a stated goal of maintaining a 30 percent dividend payout ratio, and earnings are expected to grow by 15 percent a year. This should spawn a climate for management to reward shareholders with above average dividend increases. Great Lakes REIT (GL, REIT) offers an interesting 10 percent yield. Management’s focus is to buy older office buildings, upgrade the facility, cut operating costs and increase rent as leases are renewed. 2003 was not nice to GL, but performance should get back on track with an improving economy. European advertising giant Havas Corporation (HAVS, ADR, Advertising) has an interesting history and may be poised for a turnaround. Advertising companies don’t usually do well in recessions, and the most recent three years is no exception. Fortunes at HAVS should improve with an improving European and US economy, as HAVS maintains three offices in the US . HAVS pays an annual dividend. SEI Investments (SEIC, Financial) offers back office services to mutual funds. The company also provides trust and money management services to wealthy individuals and institutional investors.
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 US economy, and how it reacts to rising interest rates in mid to late 2004. If the US economy can maintain a four percent growth rate for the year, 2005 should begin with stock prices a bit higher than now.
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@example.com
Copyright North Shore Associates 2004