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22 StockScouter picks for 2006
It's going to be a complex year, as worries about interest rates and inflation bow to concerns about trade and Russian energy policy. Our stock-rating system suggests these names should do well.
By Jon D. Markman
Over the New Years holiday weekend, the loudest sound in America was not the Rose Parade bands or the cheers of college football fans. It was the sound of the Cold War revving up again, as President Vladimir Putin of Russia wielded the price of natural gas against a satellite nation in much the same way his Communist predecessors wielded tanks.
The sneak attack by Putin on the financial integrity of Ukraine by quadrupling the cost of its winter heating fuel shocked a lot of people in the West. It shouldnt have. The Russian leader -- who grew up in a rat-infested tenement, rose to power in the KGB and is a black belt in judo -- has, like many Russians who pine for the old Soviet system, a big chip on his shoulder. Hes determined to show Europe and the United States that Russia deserves new respect as an economic superpower.
His grounds for a Russian upgrade is not military might. As the Iraq insurgency has proven, battleships, jets and stealth technology are so passe. Instead, the grounds are Russia's vast oil and gas reserves, and their transportation -- the lifeblood and arteries of modern life. Leveraging his countrys undisputed leadership in petroleum products, Putin has essentially embarked on the weaponization of energy. And world trade may never be the same.
Ready for the climate shift
This is suddenly the background that investors must deal with in 2006. To be sure, we will fret about interest rates, inflation, the weather, corporate earnings and legislation. But after several years of focusing on these niggling microeconomic issues, we appear to be facing a period in which getting the macroeconomic climate right will be more important.
Related news and commentary on MSN Money
The difficulty of weighing so many disparate factors to come up with a personal investment plan is one of the reasons that I helped invent the StockScouter rating system here at MSN back in 2001. And just in time. As we come up on the fifth anniversary of the system, I am happy to relate that StockScouter has completed another big year. Our benchmark portfolio of 50 stocks, published at the start of every month in Market Dispatches, was up 19.7% in 2005.
The system -- which is driven by sector, market cap and investment-style tailwinds as well as company-level fundamentals and price momentum -- stuck with energy, shipping and financials pretty much all year, and put up a string of monthly results from May through September of +7.9%, +4.4%, +9.5%, +4.6% and +4.7%. That was followed by a terrible October of -10.4%, and then a two-month recovery of 1.8% and 0.7%. Not bad.
Twice every year, in January and June, I create a 20-stock, fire-and-forget StockScouter portfolio for you that does not require monthly rebalancing. They worked out well again in 2005. My January list, shown here, was up 10.5% through year end -- more than twice the market's gain. My second-half Scouter list did even better, rising 17%, vs. a 5% gain for the S&P 500 ($INX). Both relied heavily on energy and mining companies. On the January list, oil-services providers Todco (THE, news, msgs) and Dril-Quip (DRQ, news, msgs) gained 110% and 92%, respectively. On the June list, BJ Services (BJS, news, msgs) and Chesapeake Energy (CHK, news, msgs) were both up about 38%.
With the Russian bear growling and brandishing high-energy thunderbolts, you might well expect oil and gas names to dominate my list again. I wont disappoint you -- they do. Now-familiar companies like Canadian oil-sands pioneer and refiner Imperial Oil (IMO, news, msgs), Brazilian giant Petroleo Brasileiro (PBR, news, msgs) and drilling-services leaders BJ Services and Pride International (PDE, news, msgs) continue to look strong. But there are some new sectors and faces as well, as you can see in the following table.
| StockScouter 22 for 2006 | | Company | Scouter
rating | 12/30/05
Close | | Imperial Oil (IMO, news, msgs) | 10 | $99.60 | | Petroleo Brasileiro (PBR, news, msgs) | 10 | $71.27 | | Adobe Systems (ADBE, news, msgs) | 10 | $36.96 | | BJ Services (BJS, news, msgs) | 10 | $36.67 | | Airgas (ARG, news, msgs) | 10 | $32.90 | | Empresa Nacional de Electricidad (EOC, news, msgs) | 10 | $30.62 | | Pride International (PDE, news, msgs) | 10 | $30.75 | | Citrix Systems (CTXS, news, msgs) | 10 | $28.73 | | Jackson Hewitt Tax Service (JTX, news, msgs) | 10 | $27.71 | | HEICO (HEI, news, msgs) | 10 | $25.88 | | Pacific Sunwear of California (PSUN, news, msgs) | 10 | $24.92 | | RCN (RCNI, news, msgs) | 10 | $23.45 | | Motorola (MOT, news, msgs) | 10 | $22.59 | | Strategic Hotel Capital (SLH, news, msgs) | 10 | $20.58 | | Industrias Bachoco SA (IBA, news, msgs) | 10 | $19.50 | | Eclipsys Corporation (ECLP, news, msgs) | 10 | $18.93 | | King Pharmaceuticals (KG, news, msgs) | 10 | $16.92 | | SeaBright Insurance Holding (SEAB, news, msgs) | 10 | $16.63 | | Advanced Power Technology (APTI, news, msgs) | 10 | $13.63 | | Fieldstone Investment (FICC, news, msgs) | 10 | $11.86 | | Tellabs (TLAB, news, msgs) | 10 | $10.90 | | Intertape Polymer (ITP, news, msgs) | 10 | $8.97 |
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Gut-check stocks
A couple of the ideas scare me, quite frankly And that is a good thing, as its very often the stocks that look the worst at the start of a period that end up surprising everyone and rising to the top. One of those is Fieldstone Investment (FICC, news, msgs), a real-estate investment trust focused on the subprime mortgage origination market. Conventional wisdom says that homebuilders generally, and subprime lenders specifically, will get clocked this year. But Fieldstone makes our list in part because its chief executive, chief financial officer and directors have been buying the stock on the open market like crazy, obtaining $990,000 since August, on top of a $40 million corporate buyback program. The stock pays a whopping 17.5% dividend.
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