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21 stocks for '05 from the top newsletters
Investment newsletters like the Turnaround Letter and MPT Review have stellar records. Here are their market outlooks and picks for 2005.
By Michael Brush
With all the buzz about hedge funds these days, you might think theyre the only place to get high-octane returns.
Not true.
For just a few hundred dollars a year, you can get some of the best brains in the stock-picking business on your team. Just subscribe to any of the top market newsletters that beat the indexes year after year.
The market wizards behind these letters may not grab the headlines, but there's nothing boring about their results.
Take the Turnaround Letter. Its a Boston-based newsletter that picks beaten-down companies and holds them as they mend. Penned by George Putnam, this letter has produced an impressive 17% annualized gain over the past 15 years.
To build a portfolio of solid picks for 2005 from the unsung market heroes behind the newsletters, we first turned to Mark Hulbert of Hulbert Financial Digest, which rates stock letters. We picked seven of the top newsletters ranked by performance over the long-term, meaning the past 10, 15 and 20 years. Then we asked each for three picks and a market outlook.
First, a word of warning. Most of these letter writers agree you need wide diversification to reduce risk, meaning you should hold dozens of stocks. So if you cherry pick two stocks from this list and put all your money in them and lose half of it, you know who to blame.
| Top newsletters | | Newsletter | 2005 picks | Hulbert rank | Annualized return | Price, one year | | The Prudent Speculator | Integrated Silicon Solution (ISSI, news, msgs) | 1* | 20.3%* | $295 | | Keynote Systems (KEYN, news, msgs) | | | | | Pfizer (PFE, news, msgs) | | | | | Turnaround Letter | Tenet Healthcare (THC, news, msgs) | 2* | 17.1%* | $195 | | Time Warner (TWX, news, msgs) | | | | | Parker Drilling (PKD, news, msgs) | | | | | The Oberweis Report | Build-A-Bear Workshop (BBW, news, msgs) | 3* | 16.4%* | $199 | | Granite City Food & Brewery (GCFB, news, msgs) | | | | | Ceragon Networks (CRNT, news, msgs) | | | | | BI Research | Taseko Mines (TGB, news, msgs) | 4* | 16.2%* | $110 | | Continental Minerals (KMKCF, news, msgs) | | | | | Eresearch Technology (ERES, news, msgs) | | | | | MPT Review | TXU (TXU, news, msgs) | 5* | 15%* | $995 | | Apple Computer (AAPL, news, msgs) | | | | | Starbucks (SBUX, news, msgs) | | | | | Investment Reporter | Pfizer (PFE, news, msgs) | 5** | 16.2%* | $297 | | Harley-Davidson (HDI, news, msgs) | | | | | Manulife Financial (MFC, news, msgs) | | | | | Value Line Investment Survey Value Line Investment Survey | Home Depot (HD, news, msgs) | 5*** | 13.4%*** | $598 | | Peabody Energy (BTU, news, msgs) | | | | | Affiliated Computer Services (ACS, news, msgs) | | | |
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*15-year category
**10-year category
***20-year category
Source: Hulbert Financial Digest and the newsletter writers
Favoring the downfallen
Using a strict value discipline and some margin, or loans from brokers to increase the size of a portfolio, John Buckingham has helped produce impressive 20% annualized gains for The Prudent Speculator since 1987. His newsletter is the clear standout among market letters. It takes top honors over 10, 15 and 20 years, according to Hulbert.
Buckingham, who also manages The Al Frank Fund (VALUX, news, msgs), expects market gains of around 10% next year. A favorite theme is beaten-down companies that have a viable business destined to pick up again and lots of cash to protect against downside while you wait.
A compelling example is Integrated Silicon Solution (ISSI, news, msgs), a chip designer that goes for $7.90 per share and has cash of $5 per share, including investments in other companies. Another pick is Keynote Systems (KEYN, news, msgs), which tests Web-site performance. Its profitable and has $7.50 in cash supporting its $12.80 share price.
He also likes troubled drug maker Pfizer (PFE, news, msgs), which now trades as low as it has since the late 1980s, at 13 times trailing earnings. Buckingham thinks that, sooner or later, drug stocks like Pfizer will bounce back from concerns about drug safety that now plague the group. Meanwhile, you get paid a 3.2% dividend yield to wait.
Drug stocks are cheaper than they were during the Hillary Clinton health-care scare in the early 1990s, and we were well rewarded for buying them back then, says Buckingham. He purchased more Pfizer shares Friday when they dipped below $24 per share on news that its pain drug Celebrex may cause heart problems. (Buckingham holds all three stocks in managed accounts and his mutual fund. He also owns Integrated Silicon Solution and Keynote Systems in a personal account.)
Healing time
Another deep value investor, Putnam at the Turnaround Letter likes to buy risky companies dogged by problems that have crushed their stocks. Then he waits for them to heal. Putnam expects the market to gain 6% next year. But as a contrarian, he thinks sectors knocked down in 2004, like health care, may do much better.
Thats one reason a favorite pick is Tenet Healthcare (THC, news, msgs), a hospital company that lost 43% of its value this year due to ongoing government allegations of misconduct. Putnam also likes media giant Time Warner (TWX, news, msgs), only recently emerging from a cloud of accounting problems. A third favorite is Parker Drilling (PKD, news, msgs), a tiny company that may soon benefit as higher energy prices lead to more drilling for oil and gas. (Managed accounts linked to the Turnaround Letter hold positions in Parker Drilling.)
Possible headwinds?
To get his market-beating returns, Jim Oberweis Jr. of the Oberweis Report picks from the roughly 600 stocks that have a market capitalization of less than $1 billion and annual earnings growth greater than 30%. Oberweis, who also runs The Oberweis Emerging Growth Fund (OBEGX, news, msgs), expects double-digit returns for the market next year, though too much inflation or dollar weakness may create headwinds.
His top picks are: Build-A-Bear Workshop (BBW, news, msgs) a retailer of make your own stuffed animals; Granite City Food & Brewery (GCFB, news, msgs), a casual dining restaurant chain; and Ceragon Networks (CRNT, news, msgs), an Israeli company that makes high-capacity wireless network equipment.
At $32 per share following a sharp advance after its initial public offering, Build-A-Bear trades for 24 times next year's earnings estimate of $1.30 per share. With a long-term projected growth rate of 24%, that means its not cheap. So it may pay to wait for a pullback. Granite City's earnings are expected to grow 36% next year to $1.50. But the company trades at 0.88 times revenue, which looks like a bargain for that kind of growth. Earnings at Ceragon Networks were up 108% in the past 12 months, and the stock trades at 2.57 times sales, not too bad for a high-growth tech stock. (Managed accounts at Oberweis and the firm's mutual fund hold all three stocks.)
The commodity play
Breaking the rules of portfolio management, Tom Bishop of BI Research runs a small portfolio of a less than a dozen stocks on average, too small for meaningful diversification. But his stock-picking skills overcome this obstacle and land him on Hulberts top-five list for five-, 10-, 15-, and 20-year returns.
Bishop doesnt like to make broad market calls. He picks stocks by weighing a blend of fundamentals, financial strength, relative strength in the market and valuation. Two of his favorite picks are tiny plays on rising commodity prices.
First, Bishop likes Taseko Mines (TGB, news, msgs). It has long-lived copper and molybdenum mines with production costs well under current prices. Bishop suspects the stock may take off when the company resolves a labor dispute in coming weeks. Next, Bishop likes Continental Minerals (KMKCF, news, msgs). It hasnt even begun mining its copper and gold deposits in eastern Tibet. But more drilling and exploration should confirm the high value of its assets and drive the stock higher or spark a takeover, Bishop says.
He also likes eResearch Technology (ERES, news, msgs), which makes equipment that reads electrocardiogram data generated in clinical trials at drug companies. The stock was hit this year by concerns about demand. But with projected earnings growth of 20% to 30%, it looks cheap with a forward price-to-earnings ratio of 16, he says. (Bishop has personal holdings in all three stocks.)
A bold prediction
MTP Reviews Louis Navellier looks for 30% upside in the market next year, in part because he thinks stocks are cheap despite the advance since August. To pick stocks for his newsletter, Navellier X-rays the market to find what qualities investors are paying up for, things like return on equity or upward earnings estimates revisions. Then he hunts for stocks that have those features.
He likes TXU Corp. (TXU, news, msgs), an unregulated utility in Texas that carries a 3.5% dividend yield. He also favors two consumer stocks. Apple Computer (AAPL, news, msgs) is a play on continued iPod strength and demand for PCs that can better manage digital media. Starbucks (SBUX, news, msgs) is a category killer that will continue to dominate its business. The MPT Review will be renamed Emerging Growth in January. (Navellier holds all three stocks in the Touchstone Large Cap Growth Fund (TEQAX, news, msgs).)
A tight hold
Published since 1941, the Toronto-based Investment Reporter is one of the oldest market letters in North America. Editor Marc Johnson doesnt expect too much upside for the market in 2005 because of rising interest rates.
Johnson looks for well-established companies with a tight hold on their markets, a record of stock buybacks and rising earnings and dividends.
Like Buckingham, Johnson thinks Pfizer trades at too steep a discount to ignore. Hes also telling readers to buy Harley-Davidson (HDI, news, msgs) because it has a strong franchise and a record of increasing sales, earnings and dividends since the early 1990s. Johnson also likes the Toronto-based Manulife Financial (MFC, news, msgs), North America's second largest insurance company. Manulife is reaping cost-cutting gains from its merger with John Hancock. And it has a presence in China, where an emerging middle class will continue to buy more insurance.
(Johnson owns Pfizer and Manulife shares.)
The long haul
A research shop that tracks 1,700 stocks overall, Value Line also keeps a list of 100 stocks on a running buy list. Those stocks have done well enough over the years to consistently place Value Line on Hulberts top five list for returns over the 20-year time frame.
Steve Sanbourn, stock research director, expects the market to climb about 7% next year. But hes more bullish on a few controversial sectors, like homebuilders and building supplies. This helps explain why a favorite pick is Home Depot (HD, news, msgs). Sanbourn believes the retailer will continue to ride the home ownership wave, and take share from mom-and-pop hardware stores. Next, he thinks tight energy supplies will be good for Peabody Energy (BTU, news, msgs), the nation's largest coal producer.
Finally, he likes software vendor Affiliated Computer Services (ACS, news, msgs), in part because it looks cheap compared to software stocks. The company trades at a price-to-earnings ratio of 15, about the same as its medium-term projected growth rate of 15% to 20%. Many software companies typically trade for two or more times their growth rates. (Sanbourn doesn't hold any of these stocks.)
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