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12 picks from top newsletters for 2006
A strong economy and fairly cheap money should boost stocks, especially tech and retail, these experts say. But watch out for the energy slump.
By Michael Brush
Whats up for stocks in 2006?
The good news: Well see 10% to 15% gains in the broad stock market indexes next year -- thanks to a strong economy and today's relatively low prices on stocks. Economically sensitive sectors like retail and technology should do particularly well.
And the bad: Energy stocks -- 2005's big winners -- may be in for a rough patch. A pullback in energy prices as we come out of the winter heating season could spark a correction in the group through February or March. At that point, energy stocks would be a buy, as the long-term bullish trends are still in place.
That's the rough consensus of the seven analysts and forecasters whose opinions I sought.
The group includes two gentlemen who have consistently made good calls in my column: James Paulsen, the chief investment strategist at Wells Capital Management, and Amir Arif, a Friedman Billings Ramsey energy analyst. I also consulted the Hulbert Financial Digest, which tracks investment newsletters, to find five writers with the best long-term records.
Related news and commentary on MSN Money
An economists view
Before we get to stock picks, lets take a look at the big picture.
Some investors worry that two obstacles will hold back stocks in 2006: higher interest rates and a slowdown in home refinancing that will hurt consumer spending.
Paulsen, an economist, thinks both these views are wrong.
On interest rates, he points out that, while the current Fed rate-hike campaign seems dramatic, it really isnt. Interest rates were at historic lows when the Fed began, and the cuts have only made up for the panic rate-cutting carried out earlier this decade to get the economy out of a slump. Real interest rates are still low: With prices rising at about 3.5% a year, the real return on 10-year Treasury notes yielding 4.44% is less than a percentage point.
As for the consumer, Paulsen thinks job growth in a healthy economy -- even in manufacturing -- will make up for a slowdown in mortgage refinancing.
He also thinks government spending -- which will produce a $400 billion federal budget deficit in the coming year -- will continue to spur growth.
The bottom line: Paulsen sees a 15% gain in the Standard & Poor's 500 stock index ($INX) next year and healthy economic growth of about 4%. Technology stocks will do particularly well as companies invest more of their cash hoard instead of using it to buy back stocks or increase dividends. Retail stocks will beat the broader market as investors realize consumers are still spending. And small caps will continue to better large-cap stocks because they typically do better when economic growth is robust.
Comeback plays
John Buckinghams Prudent Speculator newsletter tops the Hulbert ranking for 10-, 15- and 25-year performance, with annualized gains in the 18% to 28% range for those time periods. (All newsletter results are as of Nov. 30.) Buckingham expects the broad market indices to be up about 10% in 2006.
He likes American Eagle Outfitters (AEOS, news, msgs), a teen retailer whose shares have fallen to $21 from above $33 in the summer because of weak sales results. But American Eagle has a good track record of recognizing fashion trends, and Buckingham believes the company hasn't lost its touch. That's why he likes the stock now, while its cheap -- trading at just 10.7 times next year's earnings. American Eagle has $3.70 a share in cash and a dividend yield of 1.4%.
ConocoPhillips (COP, news, msgs) shares have fallen to $60 from $70 since September, in part because investors worry that the energy giant may be overpaying for Burlington Resources (BR, news, msgs) in a takeover announced Dec. 12. Buckingham believes ConocoPhillips can pull out of the slump -- in part because its a big refiner in the U.S., which has a shortage of refining capacity. The stock looks cheap at 6.5 times next year's earnings estimates, and it pays a decent 2% dividend yield.
Drinking in the profits
OTC Insight, written by money manager Jim Collins, ranks third in Hulbert's 15-year category, with annualized returns of 18.2%. Collins uses a combination of fundamental analysis and quantitative screens that find stocks with reliable price momentum.
Collins is bullish on stocks for 2006. In retail, he likes Hansen Natural (HANS, news, msgs), which makes popular new age beverages and energy drinks. Hansen stock has more than quadrupled in 2005, but Collins thinks sales growth -- and the possibility of being acquired by one of the beverage giants -- will continue to drive the shares higher.
Gildan Activewear (GIL, news, msgs), a Canadian company that sells casual clothes, saw fourth-quarter profits grow by nearly 74% as sales ramped up 24%. Despite that growth and a stock price thats jumped to $43 from $16 in the past 12 months, Gildan trades at a price-earnings ratio of just 17.8.
More from 2005's winners
Louis Navellier's Emerging Growth newsletter tops Hulberts 20-year category, with an 18.7% annualized gain. Hes looking for an advance of at least 15% for the S&P 500 index next year.
His favorite picks already have generated monster gains: NutriSystem (NTRI, news, msgs), which offers prepackaged food designed to help dieters count calories, and Google (GOOG, news, msgs). NutriSystem is up 1,500% in the past 12 months, while Google is up about 160%.
Navellier acknowledges that both stocks look expensive, but he thinks their powerful growth makes up for this. Both of these stocks have explosive growth and dramatic profit margin expansion, he says. Navellier also thinks Google will get a boost because it will be added to the S&P 500 index.
Two turnarounds
As author of The Turnaround Letter, George Putnam looks for cheap companies that are coming out of a slump. This approach has earned him the No. 2 spot on Hulberts rankings for 15-year returns, with 20.5% annualized gains.
Putnam is looking for gains in the S&P 500 of around 6% next year. Putnam recommends JDS Uniphase (JDSU, news, msgs) despite its recent advance to $2.50, from below $1.50 earlier this year. He sees the company as a play on big spending by telecom providers, like Verizon Communications (VZ, news, msgs), as they upgrade their systems to offer home video and compete with cable companies.
He also likes Taiwan Semiconductor (TSM, news, msgs), which manufactures chips for sophisticated chip-design companies. Taiwan Semiconductor should benefit from the increased use of chips in everything from cell phones to cars and dishwashers.
Value in Home Depot
Value Line stock research director Steve Sanbourn doesnt expect the market indices to finish 2006 much above where they are now. He believes higher interest rates and a slowing economy will weigh on stocks.
But the investment research shop, ranked No. 2 for 25-year returns, with annualized gains of 13.7%, still likes retailers catering to the housing sector and parts of the energy sector. So it has a buy on Home Depot (HD, news, msgs), which Value Line analyst William Lee believes can continue to grow by expanding into cities and serving more professional builders.
Next, as oil and natural gas prices have shot up, utilities are using more coal to produce electricity. So coal companies are revving up their mines. To do so, Value Line says, they need more equipment -- like the machinery produced by Joy Global (JOYG, news, msgs).
Sticking with hard assets
A newcomer to Hulberts hot newsletter lists, Outstanding Investments, focuses on commodity and natural-resource plays -- one reason the letter's picks are up an annualized 31.6% over the past five years. Justice Litle, who writes the letter, expects the broad market to be flat or down in 2006 because of slowing growth.
But Litle thinks the ongoing bull market in commodities should continue. He particularly likes BG Group (BRG, news, msgs), a U.K. company with natural-gas holdings and distribution systems around the globe. Litle sees BG as a play on ongoing shortages of natural gas in North America, which he expects to keep prices high for years.
Litle also thinks gold prices will stay high, and he recommends Goldcorp (GG, news, msgs), a Canadian company that mines gold and other metals in several countries around the world.
Out of energy
One cautionary note: Friedman, Billings analyst Arif, who made some of the best energy calls in my column last year, thinks now is the time to get out of energy names.
He thinks natural-gas prices will be lower by late February as winter demand eases. That could spark a 10% to 20% pullback in energy stocks. The momentum has carried these names too far, so this is a time to be taking profits in energy stocks, Arif says. But since the long-term bullish trends remain in place, hed buy back in late February or early March.
At the time of publication, Michael Brush did not own or control shares of companies mentioned in this column.
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