In January 1995, I started offering readers a list of 10 stocks to consider for the year ahead, making my selections from the choices of market pros whose opinions I value. In five years of this exercise, my lists returned an annual average of 24 percent, compared with 28 percent for the benchmark Standard & Poor's 500-stock index. My sabbatical spared me the ignominy of almost certain losses from 2000 to 2001, but I'm back for another try for 2003 -- a bit early, so you can do your stock shopping in time for Christmas.
Before we get to the numbers, a few warnings:
1. It's never easy to beat the market as a whole. Although my picks did pretty well, you would have been better off with an index fund from 1995 to 1999.
2. While the stocks below are selected for their prospective performance over the next 12 months, I do not believe in owning stocks for only a year. Think of this list as a set of ideas for further study and, among the 10, search for the companies you want to own forever.
3. As it turned out, the portfolio is weighted toward smaller stocks, perhaps because they are simply more interesting than the big brand-name companies. The final list is well balanced by sector, but it includes four large-caps, four mid-caps and two small-caps.
4. No guarantees.
Here, then, is the list for 2003, in alphabetical order . . .
* Apple Computer (AAPL): "Although I have no plans to switch my Windows allegiance to the Macintosh, I have always marveled at Apple's ability to persevere with the odds so often stacked against its survival." So writes John Buckingham in the most recent issue of the Prudent Speculator (877-817-4394), the stock-picking newsletter that's ranked No. 1 over the past 20 years by the scorekeepers at the Hulbert Financial Digest. Apple has been crushed lately, dropping 40 percent from its April high, and it posted a loss in the most recent quarter. Still, Buckingham thinks the "future is bright," and Apple has an attractive lineup of products, including the tune-toting iPod, and a fine balance sheet. Buckingham named Apple "Stock of the Month" for December and points out that the last time it won such an honor was under similar conditions in 1997. Two years later, the newsletter issued a "sell" recommendation at a 500 percent profit. Apple certainly appears cheap -- with more than $4 billion in cash and short-term investments and virtually no debt for a company that has a market capitalization (value according to investors) of $5.6 billion.
* JetBlue Airways (JBLU). Since its inception in December 1995, the Raymond James & Associates list of 10 best picks for the year ahead has returned an annual average of 47 percent, compared with just 9 percent for the S&P, an index it thoroughly whipped in each of the seven years. That's a fantastic record, and each year I pay close attention to the choices. The new list, just out last week, includes my favorite initial public offering of 2001: JetBlue Airways, which has just about everything going for it -- strong balance sheet, low costs, new fleet of planes, excellent routes, highly productive nonunion workforce, good cash flow, access to capital markets to fund its growth, demoralized competitors teetering on bankruptcy and customers (like me) who love the product. In a commodity business, JetBlue stands out for its use of technology and its great service (for example, live TV at each seat and a wonderful Web site for booking flights). Remember, however, that JetBlue is still small (market cap, $1.8 billion; revenue, $624 million) and the airline industry is highly volatile and at the mercy of oil prices and economic cycles. JetBlue's price has come back to reality after soaring to $55 shortly after the IPO, and, at $38 a share on Thursday, the stock's P/E (price to earnings) ratio, based on Raymond James's projections for 2003 profits, is 22 -- absurdly tame for a company that, if analyst Jim Parker is correct, could double its earnings in each of the next three years.
* MONY Group (MNY): James Roumell, a Chevy Chase money manager with a sensational record and a deep-value style, won the Wall Street Journal's "dartboard" stock-picking title twice before the contest was discontinued. His pick for our 2003 list has been a public company for only four years. It's the former Mutual of New York, a venerable life insurance company that also owns a small mutual fund business (Enterprise), a brokerage firm (Advest) and a municipal-bond house (Lebenthal). Roumell admits that MONY Group's management "cannot be described as stellar operators," but shares appear very cheap. The stock trades at about half its book value (net worth on the balance sheet). Also, says Roumell, "there is a real consolidation angle. MONY, with a market cap of $1 billion, has excellent assets to sell to other companies in a fragmented industry, and in November 2003 the firm reaches its fifth anniversary of "de-mutualization," which means that, by law, outsiders can acquire more than 5 percent of the stock without getting insurance commission approval. That could significantly boost demand for the stock, which is down 40 percent from its April high.
* Nissan Motor (NSANY): The Value Line Investment Survey (800-833-0046), often cited in this column, has a stellar long-term record of picking winners among its "1"-rated stocks -- the top 100 among the thousands the firm analyzes. Nissan is currently the only 1-rated auto company -- and one of the few large manufacturers of any sort with that ranking. New management has rejuvenated the firm, Japan's third-largest automaker, whose U.S. models include the Altima, the Maxima, the Pathfinder, the Infiniti luxury brand and the spiffy new 350Z. "We remain optimistic about the company's longer-term prospects, as strong sales momentum, higher production rates, and a hearty product pipeline are likely to fuel Nissan's top- and bottom-line growth," wrote Value Line analyst Anthony Panolfi earlier this month. Don't let the fact that Nissan is based in a country that's been stagnant for a decade scare you off. Its chief executive, Carlos Ghosn, was born in Brazil and educated in France; it has plants all over the world; and last year Japan accounted for only about one-quarter of all sales. Nissan's shares trade in the United States on the Nasdaq as American depositary receipts, with a P/E of just 9 and a market cap of $36 billion.
* Procter & Gamble (PG): The researchers at Standard & Poor's currently bestow their top rating (five stars) on only 89 stocks and, among those, the inner circle is the Top 10, which includes Cincinnati-based P&G, maker of Tide, Dawn, Joy, Crisco, Jif, Folger's, Old Spice, Clairol and on and on. The stock collapsed three years ago from $118 to $52 on concerns about weak sales and stumbling management. The company brought in a new chief executive, and its Beautiful Line of earnings never faltered. P&G stock is still cheaper by one-fourth than it was at the end of 1999, even though profits per share are up 26 percent and the yearly dividend has increased from $1.14 to $1.52. Value Line ranks the company "1" (tops) for both timeliness and safety and rates it "A++" (also tops) for financial strength.
* St. Joe Co. (JOE): James Grant, editor of the estimable Grant's Interest Rate Observer (212-809-7994) and a pessimist on stocks for the past decade or so, turned, in a recent issue, to Paul J. Isaac, chief investment officer of Cadogan Management, with an intriguing question: "A friend of a friend has sold his business. He would like to put the proceeds to work for the benefit of his descendants, not all of whom have come into the world. How would [you] invest it?" Isaac suggested buying companies with lots of exurban land in dynamic areas of the South, Southwest and West. Thus, St. Joe, which owns nearly a million acres -- both developed and not -- mainly in northwest Florida. The mid-cap stock has been a steady performer, up nearly 10 percent this year. The P/E is 21, but earnings -- at this stage -- aren't really the point. The point is owning assets that are undervalued today but will get very attractive as time passes.
* Standard Commercial (STW): "Where do you find these things?" That's the question I continually ask Jay Weinstein of Oak Forest Investment Management in Bethesda. Weinstein has had great success discovering tiny companies you have never heard of -- like Standard Commercial, whose bland name belies its controversial business. It's one of just three global leaf-tobacco merchants -- buying, processing, selling and shipping tobacco grown in 30 countries. Customers, of course, are the big cigarette companies. Management, says Weinstein, has spent the last three years cleaning up the balance sheet, and the stock looks cheap. "The forecast this fiscal year is for earnings of $3.05 a share, so the P/E is only 5.5," says Weinstein. And the stock appears to provide a way to buy tobacco without the litigation risk. Note that the market cap is only $240 million, so there's a potential for sharp volatility.
* Stryker (SYK): One of my favorite mutual funds, Jensen (JENSX), has consistently whipped the S&P, with lower risk, by running an exclusive club. To get in, a company first needs to deliver a return on equity of at least 15 percent in each of the past 10 years (only about 100 of 10,000 firms qualify). Next, the stock has to trade at a discount of 40 percent to its intrinsic (or discounted cash-flow) value, according to the fund's managers. That leaves, at last count, just 26 stocks. One of them is Stryker, which makes orthopedic products such as knee, hip and spinal implants, plus operating instruments, stretchers and maternity beds for hospitals. Stryker's stock has tripled in the past five years, and last week it was trading at close to its 2002 high, with a P/E of 41. Expensive? Value Line's analyst, George Rho, says, "We're confident that share net will continue to compound at a 20 percent-plus rate to 2005-2007." After all, Stryker, with a market cap of $12 billion, is a superbly run company in a growth industry.
* Too Inc. (TOO): Elliott Schlang and Gregory Halter run LJR Great Lakes Review, a Cleveland-based research service for institutional investors like mutual funds and pension plans. Their specialty is finding boring companies in the Midwest that are both dynamic and cheap. The problem, Schlang told me, "is that this year we're down only 7.3 percent [compared with a loss of 20 percent for the S&P]. The bad news is that there are only six stocks we're recommending as buys." One of them is Too, a fast-growing retailer that was spun off from Limited in 1999. Too sells clothes, jewelry and shoes, mainly to girls aged 7 to 14. Too's earnings have increased at an annual average of 52 percent over the past five years, it has lots of cash and no debt, and its margins are sensational -- 26 percent on equity and 7 percent on sales. With about 500 stores now and at least 1,000 as a goal, Too has been successful at appealing to the changing tastes of what Schlang calls "the highly erratic young woman." The risk is that the management won't keep up its merchandising streak forever. Still, the price appears exceptionally modest. Schlang estimates earnings at $1.82 for fiscal 2003, for a P/E of just 14, and shares of the company (with a market cap of $900 million) are down by nearly one-fourth since April.
* United Online (UNTD): In these parsimonious times, this Internet service provider offers consumers low-priced and (in some cases) free access to the Web under the brand names NetZero, Juno and BlueLight. Revenue jumped in the last quarter to $58 million, from $14 the year before, and the company is now making a profit. United's market is highly competitive, but the biggest player, America Online, has clearly lost its edge, and even United's most expensive service undercuts AOL's price by more than half. The stock is the choice of Jim Collins, editor of OTC Insight (800-955-9566), a newsletter that focuses on smaller growth stocks and that's ranked No. 1 over the past 15 years by Hulbert. United, with a market cap of less than $700 million, has a hefty $150 million in cash and short-term investments on the balance sheet and just $2 million in debt. Unlike most of the stocks on this list, United's price has risen sharply, more than tripling in the past 12 months. Still, earnings are projected to reach nearly $1 a share in 2003, which, at current prices, indicates a P/E of 17. Pretty reasonable.
Correction: In my Dec. 1 column, I used outdated figures in stating that Legg Mason Value Trust, which has beaten the S&P for 11 years in a row, was slightly trailing the index this year. In fact, it was ahead at the time, and still is -- by 3.5 percentage points as of Thursday.
James K. Glassman's e-mail address is firstname.lastname@example.org. He welcomes questions and comments but cannot respond to all.