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Jubak's Journal
Recent articles:
• 5 winners for the winner-take-all market, 4/13/2004
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Jubak: 5 portfolio-building stocks
I want stocks that are relatively cheap with solid long-term growth stories. I also want climbing earnings expectations and stocks that pay a decent dividend.
By Jim Jubak
Lets say youre lucky enough to be getting a tax refund from Uncle Sam this year. Maybe just a few hundred dollars. Maybe as much as a few thousand dollars. What do you do with this found money?
Me? Whenever I get an unexpected refund, I like to put it to work in the stock market, buying the blue-chip growth stocks that are the core of my portfolio. That used to be tough to do without paying ridiculous brokerage commissions to buy a few shares or without restricting your potential purchases to the few companies that sold stock direct to investors. But now, thanks to the spread of direct purchase plans to more companies and to the growth of programs like Sharebuilder.com that let investors buy shares for a fee as low as $2, you can put that refund exactly where you want it.
And what kind of stocks do I buy with my refund check?
The criteria
I want stocks that are relatively cheap compared to the market averages, with solid long-term growth stories. I also want climbing earnings expectations and stocks that pay a dividend of at least 1.2% so that I can reap the full benefits of dividend reinvestment and compounding over the long term. (And to make sure that these stocks are liquid enough so that I wont get whipsawed when I buy or sell, I look for stocks with market capitalizations of $5 billion or more and a share price above $10.)
Ive built a screen on CNBC.com on MSN to identify stocks that fit into these parameters. (You can run it for yourself by following this link.) When I ran it on April 12, it came up with 113 names. From that group, Ive picked five stocks, one each from the financial, energy, health-care, consumer and natural resources sectors. With these, you can start to build a balanced growth-stock portfolio with just a few hundred dollars.
And maybe once youre started youll get into the habit of putting a few dollars into each stock every month. Thats the way to build wealth over the long term. (All of these stocks are available through Sharebuilder.com and many have direct purchase plans, dividend reinvestment programs or both.)
The list
Bank of America (BAC, news, msgs). This is a good time to pick up shares of one of the emerging national banking franchises. Bank of America shares were pummeled late last year by investors who felt the bank was paying too much for FleetBoston, even if the deal gave Bank of America a big footprint in the Northeast. The stock now trades at just 11.3 times next years projected earnings per share. Wall Street analysts believe that earnings will climb by almost 10% in 2005. The shares yield 3.9%.
BP (BP, news, msgs). Every investor needs to own an oil-and-gas stock as we face a decade of rising energy prices, climbing production costs and geopolitical instability in the regions that produce the bulk of the worlds oil. Of the majors I prefer BP because of the companys big stake in the Russian oil fields, which makes BP one of the few companies just about guaranteed to be able to increase production and reserves in the next few years. The stock now trades at just 15.7 times next years projected earnings. Wall Street analysts see lower oil prices for 2005 -- and lower earnings at BP -- but I think thats just plain wrong. The stock yields 3.2%.
Johnson & Johnson (JNJ, news, msgs). The pharmaceutical sector isnt getting much respect from investors these days, and that makes this a great time to pick up shares of a company like Johnson & Johnson. The company has grown earnings at an annual average of 15% over the last five years and is projected to boost earnings by 13% annually over the next five years. The stock trades at just 17.2 times next years earnings. It yields 1.9%.
Exclusive picks for CNBC.com
PepsiCo (PEP, news, msgs). It's the most expensive stock of the five: PepsiCo shares trade at 23.8 times next years projected earnings. Thats just about the average price-to-earnings ratio for the Standard & Poors 500 on current earnings. But for that price you get the worlds best one/two punch in the consumer sector -- the combination of Pepsi, Gatorade, Tropicana and the companys other well-managed beverage lines with the unmatched supermarket clout of salt-food giant Frito-Lay. Wall Street estimates that PepsiCos earnings will grow by 11.8% next year. After a recent dividend hike, the shares yield 1.68%.
Plum Creek Timber (PCL, news, msgs). The company owns lots of trees and the land on which they grow: 8 million acres in 20 states to be exact. This makes the company the kind of double-barreled play on rising commodity prices (which will increase prices for the companys lumber) and on rising inflation (which will increase the prices the company gets as its real estate division sells land). The stock trades at 21.7 times next years projected earnings per share. Wall Street's estimate of 2.5% earnings growth for 2005 doesn't reflect the efficiencies that improved management has brought to the company. The shares yield 4.9%.
Nobody ever intentionally overpays their taxes. But isnt it nice to know that if you did fork over too much cash that this found money can be put to good use?
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: BP and PepsiCo. He does not own short positions in any stock mentioned in this column.
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MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
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