Long-term buy list review

9/8/2008


2008 has not been kind to stock investors. The Forecasts’ Long-Term Buy List is outperforming the S&P 500 Index by a wide margin but remains down for the year.

As of Sept. 2, the Long-Term Buy List was down 7.0% on a fully invested basis, versus a 13.0% decline for the S&P 500 Index, as shown in the chart on page 6. Such performance is not a surprise, as more than two-thirds of the stocks in the S&P 500 have lost value this year.

Our Long-Term Buy List’s performance illustrates two key truths about the Forecasts’ stock-selection system. First, our strategy is working. Our goal is to beat the S&P 500, and we’re doing that. Second, our strategy is designed to limit losses during down markets by focusing on superior stocks, but is not designed to rotate into the type of countercyclicals that go up when the market is down.

Subscribers have asked us why we stick with our chosen stocks when market conditions are unfriendly. Here are three of the most important reasons:

Sticking to convictions. Numerous investment strategies work if followed consistently. We use the Quadrix® system to identify a basket of stocks with strong potential, then follow up with individual company analysis to select the best candidates from that basket. The best ally of an investor with a good system is patience. If we abandon our system every time the market gets turbulent, we cannot expect to reap the benefits of that system during the good times.

Bull-market signal. History tells us that while the Dow Theory isn’t perfect, it is right more often than it is wrong. In April, the Dow Theory turned bullish. Until the averages close below July lows, Dow Theorists will regard the current weakness as a correction within a bull market.

Risks of being wrong. Few people can pick market tops or bottoms even once, and nobody can do it consistently. It’s easy to say, “Just get out of stocks before the market falls, then buy back in when prices are lower.” But if it were as easy as it sounds, everyone would do it. We prefer to keep most of our money in quality stocks during a bull-market correction, positioning ourselves to profit from the recovery.

All of the stocks on our Long-Term Buy List offer superior total-return potential over the next two to four years.

LIST RETURNS
Focus
List
(%)
Buy
List
(%)
LT Buy
List
(%)
S&P
500
Index
(%)
2008†
(13.1)
(14.4)
(7.0)
(13.0)
2007
22.8
18.1
10.4
3.5
2006
12.9
14.8
9.3
13.6
2005
8.1
10.3
3.5
3.0
2004
17.5
18.8
8.7
9.0
2003
20.2
25.0
24.0
26.4
2002
(28.9)
(25.8)
(18.2)
(23.4)
2001
(16.0)
(15.6)
0.3
(13.0)
2000
14.0
(1.4)
5.0
(10.1)
Since 2000 †
25.2
17.2
34.8
(13.0)
Since 2004 †
53.0
51.9
26.3
14.9
† Through Sept. 2.
Notes: Returns are fully invested and exclude dividends and transaction costs.

Gustav not bad as expected
Hurricane Gustav did not pack the punch forecasters predicted — good news for both insurers and energy companies. While it is unclear how the region truly made out, it appears serious damage to oil refineries and drilling rigs was limited. One early estimate said total insured losses would range from $4 billion to $10 billion, excluding flooding damage, which is typically covered by federal insurance. Insurer MetLife ($55; NYSE: MET), a Long-Term Buy, has provided no estimates for its Gustav exposure, but home and automobile coverage generate less than 10% of profits.

Several of the largest oil producers in the Gulf of Mexico reported minimal damage to their rigs. Oil prices fell, and many energy stocks fell as well. Several of our favorite oilfield-services stocks — including Focus List Buys Oceaneering International ($57; NYSE: OII) and Transocean ($124; NYSE: RIG) — have dipped sharply in recent trading. Don’t panic. While the decline in energy prices has depressed the stocks, those lower prices are unlikely to have much effect on the companies’ profits, and solid profits should support higher stock prices.

News roundup
According to data compiled by the Semiconductor Industry Association, global sales of semiconductors hit $22.2 billion in July, up 7.6% from a year earlier but down slightly from a June increase of 8%. Excluding flash-memory products, which have been plagued by weak pricing, total semiconductor sales would have increased 11.6%. SIA credited the gain to strong demand for consumer electronics, computers, and cell phones, which bodes well for top tech picks Qualcomm ($51; NASDAQ: QCOM), IBM ($118; NYSE: IBM), and Hewlett-Packard ($46; NYSE: HPQ). Qualcomm and IBM are Focus List Buys and Long-Term Buys. H-P is a Buy and a Long-Term Buy . . . Google ($465; NASDAQ: GOOG) plans to release its own Internet browser, called Chrome, to compete with Microsoft’s ($27; NASDAQ: MSFT) ubiquitious Internet Explorer. Google hopes its new product will drive more programs off the desktop and onto the Web. While Chrome is an interesting concept and Google a sexy name, taking substantial market share from Microsoft will be difficult. Microsoft is a Buy and a Long-Term Buy. Google is rated Neutral . . . A European study showed that patients taking Vytorin, a cholesterol drug sold by Merck ($35; NYSE: MRK) and Schering-Plough ($19; NYSE: SGP), were more likely to contract cancer than patients taking a placebo. While the study’s researchers dismissed the high cancer incidence as a “fluke,” other researchers are more concerned. The U.S. Congress is already investigating Vytorin’s possible cancer link, and the new study casts more doubts on a drug both companies hoped would jump-start sales. Merck is rated Neutral . . . The International Association of Machinists and Aerospace Workers recommended that almost 27,000 Boeing ($66; NYSE: BA) workers vote against a new contract and go on strike. At press time on Wednesday, workers’ votes had not yet been counted. Boeing is rated Neutral . . . Walgreen ($36; NYSE: WAG) posted August sales of $4.90 billion, up 6% on 0.9% higher same-store sales. Walgreen is a Long-Term Buy . . . Citing an oversupply of liquid-crystal televisions, Corning ($20; NYSE: GLW) lowered its profit target for the September quarter. Corning is rated Neutral.

Mergers and deals
Coca-Cola ($52; NYSE: KO) agreed to pay $2.3 billion for China Huiyuan Juice Group, which controls more than 40% of China’s market for pure juice. Coke is rated Neutral . . . BP ($54; NYSE: BP) agreed to pay $1.9 billion for a 25% interest in Chesapeake Energy’s ($45; NYSE: CHK) Fayetteville Shale natural-gas fields in Arkansas. A month ago, BP paid Chesapeake $1.7 billion for shale assets in Oklahoma. BP is rated Neutral.

July-quarter earnings
Dell ($21; NASDAQ: DELL) reported earnings per share of $0.31, down 3% and well below the consensus of $0.36. Fueled by strong sales of notebook computers, revenue rose a healthy 11% to $16.43 billion and topped the consensus. However, gross profit margin dipped nearly three percentage points, reflecting aggressive pricing. Dell is rated Neutral . . . Excluding gains from asset sales and a legal reserve, Sears Holdings ($92; NASDAQ: SHLD) said earnings per share were $0.19, down from $1.14 in the year-earlier period and well below the consensus of $0.33. Revenue fell 4%, with U.S. same-store sales down 6.2%. Management trimmed its profit guidance for fiscal 2009 ending January. Sears is rated Neutral.

Looking for growth? Call Qualcomm
The outlook for Qualcomm ($51; NASDAQ: QCOM) looks promising. Qualcomm’s products use a wireless technology called CDMA, which is becoming the standard for next-generation mobile phones.

With cell phones increasingly being used for more than just voice services, CDMA offers advantages over other technologies because it can handle multiple functions. Qualcomm’s volume growth has been robust in recent quarters as consumers increasingly migrate to third-generation, or 3G, phones.

Qualcomm is also expanding into technology that provides mobile Internet service through laptop computers and navigation devices. Consensus estimates project per-share-profit growth of 10% in fiscal 2008 ending September and 20% in fiscal 2009. Down more than 10% from August highs, Qualcomm trades at 19 times estimated year-ahead earnings, below the five-year average forward P/E ratio of 24 and a reasonable price for an industry leader with substantial growth potential. Qualcomm is a Focus List Buy and a Long-Term Buy.


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