3 Resolutions For The New Year -- And 2 Long-Term Buys

12/28/2009


While drawing investment-related conclusions from a single year is typically a mistake, our successes and failures in 2009 highlight the need for some New Year’s resolutions. Among lessons learned in 2009, the three below seem particularly noteworthy:

Don’t let a long-term focus become an excuse for inaction. Our Long-Term Buy List is designed to be a fairly low-turnover portfolio of investment-grade stocks. For the most part the list has served that aim admirably, outperforming the S&P 500 Index with below-average volatility. On average, the Long-Term Buy List has seen about 12 downgrades annually over the past six years, making it a relatively easy and low-cost portfolio to mimic.

Nevertheless, the Long-Term Buy List would have performed better in 2009 if we had been quicker to drop some brand-name laggards. So, under the category of better late than never, we’re replacing Exxon Mobil ($69; XOM) with Abbott Laboratories ($54; ABT). For buy-and-hold investors seeking the one energy stock they can own for the next 10 or 20 years, Exxon is still tough to beat. The company’s track record and assets rank among the best in the sector.

But the Long-Term Buy List targets 24- to 48-month returns, and Abbott offers a better choice for that timeframe. Based on Quadrix scores, valuations, and growth prospects, Abbott represents a superior choice. The stock earns a 93 Overall Quadrix score, with a 76 for Value. Double-digit profit growth is expected for full-year 2009 and 2010, and profit estimates have been moving higher.

Don’t confuse size with quality. In general, bigger companies have superior track records and finances. That is especially true today, as large companies have withstood the recession comparatively well. But exceptions to the rule can make the best investments, and our decision to stick with Schlumberger ($64; SLB) despite less-than-stellar Quadrix scores and quarterly results was a mistake.

Schlumberger is one of the largest, most technologically advanced, and most diversified players in oilfield services. But its broad-based exposure has made it impossible for Schlumberger to sidestep the industry downturn, and profits seem likely to rebound only modestly in 2010. By contrast, results at Oceaneering International ($59; OII) have held up well this year, reflecting its focus on deepwater oilfield services. The company says it expects relatively flat earnings for 2010, but Oceaneering seems likely to exceed expectations if oil prices remain near current levels.

Schlumberger’s stock-market value is 25 times that of Oceaneering. But Oceaneering ranks far better based on track record, operating momentum, and earnings-estimate trends. With 33 stocks on the Long-Term Buy List, the switch into Oceaneering from Schlumberger is likely to have little impact on portfolio volatility.

Be wary of consensus opinion, especially when the numbers tell another story. One of our best decisions of 2009 was the addition of more health-care stocks, even as Wall Street strategists were telling investors to steer clear because of uncertainty regarding health-care reform. Average Overall Quadrix scores on health-care stocks reached 15-year highs in mid-2009, reflecting a sharp jump in Value scores.

The sector continues to earn above-average Value scores, and Performance scores have improved as the group has rallied steadily since early November. Worst-case expectations for price controls were avoided in the bills passed by the House and Senate, both of which call for massive increases in public spending on health care. Top health picks include AmerisourceBergen ($26; ABC), Hospira ($49; HSP), and Stryker ($51; SYK).


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