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Jubak's Journal
Recent articles:
• How to outsmart an edgy market, 9/12/2003
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| | Jubak's Journal
Now is the time to buy blue chips
While the tech rally keeps running, take a look at long-ignored steady-growth names such as Pepsi, Avon and AIG. When fear returns, these names will shine.
By Jim Jubak
This stock market hates blue-chip growth stocks, the kind that long-term, buy-and-hold investors use for the core of their portfolios. Over the last one- and three-month periods, stocks such as American International Group (AIG, news, msgs), PepsiCo (PEP, news, msgs) and Avon Products (AVP, news, msgs) have badly lagged the technology rockets powering the Nasdaq market. And this relative underperformance could well continue for the next three months.
Thats why this is a good time for long-term, patient investors to start, or add to, positions in these portfolio cornerstones.
Right now is the time to accumulate shares of American International, Avon Products, Microsoft (MSFT, news, msgs), PepsiCo and Pfizer (PFE, news, msgs). Im giving each of them a buy rating in my update of the 50 Best Stocks in the World portfolio. (Microsoft is the parent company of this site.)
And at the end of this column, Ill revise the membership in that portfolio by replacing AOL Time Warner (AOL, news, msgs) and Ahold (AHO, news, msgs) with First Data (FDC, news, msgs) and Charles Schwab (SCH, news, msgs). (Please note, however, that neither of those two stocks rates a buy at current prices.)
Why now?
What has created the buying opportunity in blue-chip growth stocks? The amazing rally in technology and other high-volatility sectors such as biotechnology since the March 11 bottom in the indexes. Who wants the safe haven of a PepsiCos steady growth when a PMC-Sierra (PMCS, news, msgs) is racing ahead by 133% in just six months, an AmeriTrade Holding (AMTD, news, msgs) is climbing 180% and a Genentech (DNA, news, msgs) is rising 152%.
The treatment of safe stock names hasn't gotten any better in recent weeks, either. In the last three months, the Nasdaq Composite Index ($COMPX) is up 13%; in the last month alone, the index has risen 9%. Meantime, look at the performance for these five blue-chip growth stocks:
| Blue-chip growth stock performance | | Stock | 3 months | 1 month | | American International Group (AIG, news, msgs) | 3% | -4% | | Avon Products (AVP, news, msgs) | 5% | 3% | | Microsoft (MSFT, news, msgs) | 14% | 9% | | PepsiCo (PEP, news, msgs) | 1% | 1% | | Pfizer (PFE, news, msgs) | -4% | 1% |
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Only Microsoft matches the returns on the Nasdaq Composite for the period -- and only, Id argue, because the stock lagged so far behind the rest of the technology sector in the early stages of the rally. From March 11 through June 11, while the Nasdaq Composite moved up 29%, Microsoft managed just a 9% gain.
If, after a choppy period in late September and early October, the stock market resumes a strong rally led by the highly volatile, high-beta stocks that have led the rally of the last six months (and I think this is the most likely scenario as we close out the year), then the safe, reliable growth of these blue chips will continue to be undervalued by investors, and the stocks will remain out of favor and underperform.
The fear factor on Wall Street is barely visible on the radar screen. But I dont expect this period of near-record-low fear to go on indefinitely. The Chicago Board Options Exchange Volatility Index ($VIX.X), closed at 20.25 on Friday, Sept. 12. Thats not far above the 18.79 low in August, a three-year low for the fear index, and well below the 40.10 open for the VIX on March 12, just as this rally began. The 52-week high on the VIX is 50.48. (The VIX measures the premium that investors are willing to pay to buy options to hedge against a fall in the market. The greater the fear of such a decline, the higher the premium.)
Any up-tick in fear will make the reliability of earnings growth at companies such as these more valuable to investors. And that will drive up the multiple that investors are willing to pay for the earnings growth of a PepsiCo or a Pfizer.
Stocks at a sweet spot
Is there anything wrong with these stocks that a shift in investor sentiment wouldnt cure? I dont think so. In fact, these stocks are in many cases the best ways to play long-term trends that are set to dominate the economy over the next decade.
For example, everything is clicking at Avon Products right now. The companys pipeline looks particularly strong with the recent launch of Mark, a new product line targeting young women, and the companys huge direct sales force gives the company a decided edge in the United States, where a national Do Not Call registry is set to produce turmoil in the telemarketing business when it kicks in this year. In China, Avons reps give the company a unique tool for penetrating that market. Sales climbed 8% in the second quarter, and Avon should be able to generate 5% annual sales growth over the next five years. Thats up from a 4% annual average over the last five-year period. In addition, Avons expansion in China makes the stock an ideal way to play growth in that fast-growing market.
AIG is at a similar sweet spot in the cycle right now. In the first half of 2003, return on equity climbed to 17%, well above the companys very healthy 13% average over the last five years. The companys AAA credit rating and strong cash flow give it an extraordinarily low cost of capital. Combined with expected increases in premiums in the companys general insurance business for the rest of 2003, that financial stability should enable AIG to post solid and improving gains on its investments as interest rates rise.
And like Avon, AIG is one of the best ways for U.S. investors to put money into the growth of the middle class in China, India and other parts of Asia. The company is the first foreign insurer to have wholly owned life insurance operations in Beijing, Shanghai, Guangzhou, Shenzhen, Suzhou, Dongguan, Foshan and Jiangmen. (As an aside, the company does not make my list of clean stocks. It recently agreed to pay a $10 million fine to settle a fraud charge leveled against it by the U.S. Securities and Exchange Commission. The SEC accused the company of trying to help Brightpoint (CELL, news, msgs) artificially smooth its earnings reports, and of attempting to thwart investigators when it became clear its practices were being examined. Only invest in American International if you think findings like that are minor problems at an otherwise aggressive but well-managed company.)
The right entry points
So how much of a buying opportunity do these stocks present at current prices?
PepsiCo and Pfizer are at load-up-the-truck prices right now. My target price for Pfizer is $42 a share, about 30% above recent prices. My target for PepsiCo is $53, about 20% above recent levels. Id be comfortable beginning positions in AIG and Avon Products at current levels, but Id hope to be able to add to those positions at lower prices if we see a continuation of the recent technology-led rally. AIG is a bargain anytime it falls below $59, and Id be looking to pick up Avon Products at $58 or better.
Microsoft is a special case in this group. Even though it is a technology stock, it lagged the technology sector for the first half of the rally and only began to match the performance of the index in the latter part of the rally. Id certainly buy the stock at current prices (please remember that I work for the company, and do your own due diligence as always on any stock I mention), and Id be willing to purchase up to about $31 a share.
Whos in, whos out of 50 Best portfolio
Now, for that promised update and revision of the 50 Best Stocks in the World portfolio:
Its time to kick AOL Time Warner and Ahold out of the portfolio. AOL is squandering the franchise that put it onto the list in the first place, and Ahold never really was the company I thought it was. The new management at AOL, which is composed now almost totally of people from the Time Warner side of the business, seems to have gone into shock at the way the deal has destroyed the value of their Time Warner stock and options packages. In reaction, theyve decided to turn the AOL business into a cash cow. But while that should produce a lot of cash in the short run that the company can use to invest in its cable and media businesses, fixing the AOL flagship Internet access business requires more cash and management creativity than this team seems inclined to invest. A company that has lost its market dominance doesnt deserve a place on this list.
Ahold, on the other hand, was just a bad mistake on my part and should never have been on the list. I bought into the companys rhetoric on its ability to form a U.S. super-super market company with improved efficiencies and margins. The distance between that dream and current reality will require years of work to bridge. In the meantime, Ahold doesnt belong on this list, either.
A number of other companies on the list bear watching over the next 12 months. Boeing (BA, news, msgs) certainly faces major challenges in its aerospace and commercial aircraft businesses, but more worrying to me is the continuing weakness in management controls and procedures. The CEO is not supposed to get blindsided by the performance of a major division, as recently happened with the aerospace unit. Im putting Boeing on probation.
Nortel Networks (NT, news, msgs) looked like it was headed off the list until the recent deals with Verizon Wireless and Bell Canada for equipment to route voice phone calls over the Internet gave it a leading position in the development of that new technology. It's now certainly worth watching if you have a long-term view.
And finally, there's Merrill Lynch (MER, news, msgs). No doubt, there was a lot of fat to cut at Merrill, but the company will someday have to answer the question of what it wants to be when the cost-cutting is over. With the pullback on so many fronts, the companys grand vision of itself as a global gatherer and manager of financial assets is clearly dead. So now what? Long-term investors need to know the answer to that one. So probation here, too.
To replace AOL Time Warner and Ahold, Im promoting First Data and Charles Schwab from the Future Fantastic 50 list. First Data gets a nod because of its dominant position in the global cash transfer business at a time when cross-border remittances from workers overseas to families back home is a huge growth opportunity. Charles Schwab doesnt own the low-cost platform for serving individual stock traders; that distinction belongs to the pure Internet investment companies such as AmeriTrade. But Schwab has a unique franchise with individual investors, partly because it doesnt do investment banking. Schwab will be increasingly cross-selling that franchise as it moves into banking, mortgages and wealth management.
The 50 Best in the World portfolio has now completed its first five years. As of Sept. 10, 2003, the one-year gain for the 50 Best was 13.4% versus a 12% gain on the Standard & Poors 500 ($INX) and a 42% gain on the Nasdaq Composite. The five-year gain on the portfolio as of that same date was 2%, versus the 1% gain on the Standard & Poors 500 during that period and a 13% gain on the Nasdaq.
New developments on past columns
5 stocks poised to lead the market back
On Sept. 12, Sysco (SYY, news, msgs) announced a 20-million-share stock buyback plan. The plan is on top of an outstanding program, approved in July 2002, to buy back 20 million shares; there are still about 9 million shares outstanding on that plan. The news helped push Sysco shares through the stocks all-time high of $32.58 set in November 2002. Sysco shares closed at $32.82 on Sept. 12.
Changes to Jubaks Picks
Sell Tom Brown
I simply think there are better opportunities in the energy and basic materials sectors right now, and Im selling my position in Tom Brown (TBI, news, msgs) to free up cash to make those buys in the next couple of weeks. Wall Street analysts have cut their earnings estimates for the third quarter from 47 cents to 44 cents in the last month and for all of 2003 from $2.14 to $2.10 in the last seven days. The stock is down 9% in the last three months. Im selling this position with a 5% loss since I added it to Jubaks Picks on May 31, 2002.
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. The Wednesday edition stems from Jim's appearance on CNBCs Business Center most Wednesday nights at approximately 5:45 p.m. ET. Selected CNBC stories can be found in the TV Reports index. At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: American International Group, Microsoft, PepsiCo, Pfizer and Sysco. He does not own short positions in any stock mentioned in this column.
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