Value Added
Best Picks for a Happy New Year
By Steven Goldberg, Contributing Columnist, Kiplinger.com
December 24, 2002
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Most of these best buy lists aren’t worth the paper they’re printed on. Indeed, they can be dangerous if taken seriously. But the list from Raymond James & Associates is a noteworthy exception.
The Florida-based brokerage does little investment banking, so its analysts’ picks tend to be more trustworthy than most.
More important, Raymond James has been producing this “analysts best picks” list since 1996. Not only have the stocks made money every calendar year -- including the last three years -- but they have beaten the S&P 500 by an annual average of 46 percentage points.
Returns were computed on the assumption that you bought an equal dollar amount of each stock on the first trading day of the year and held it through the end of that year. But you ought to treat the following list as a source of stocks for more study.
Raymond James allows only those with five years’ experience as an analyst -- or three years experience following their industry as lead analyst -- to submit nominees.
Each analyst can submit only one pick, market caps must be at least $500 million, and only one stock per industry is chosen.
Picks of the Litter
CBRL Group (CBRL), formerly called Cracker Barrel, operates more than 460 stores in 41 states and also operates 90 Logan’s Roadhouses in 17 states. Analyst Bryan Elliott says same-store sales have risen in each of the last 11 quarters, and profit margins have increased in each of the last four quarters. Because of rising margins, he believes earnings will grow 20%, allowing it to earn $2.13 next year—higher than consensus estimates. The P/E based on his estimate is just 13. The company is buying back shares.
Centex Corporation (CTX). Critics keep predicting a housing collapse. But Centex, one of the nation’s leading home builders, will continue to grow by acquiring smaller builders in a fragmented industry and because it’s diversified nationally in an industry noted for regional booms and busts, says analyst Paul Puryear. This 15% grower trades at just five times his calendar 2003 earnings estimate of $9.03.
Federated Investors (FII) has $180 billion in assets under management, most of it in load mutual funds. Analyst Steven Schwartz likes its powerful sales force -- the largest in its industry -- as well as its broad product offering, consisting of 140 funds. He thinks the company will grow 17% annually, and earn $1.78 next year, giving it a P/E of 15.
Home Depot (HD) was a troubled retailer, but is beginning to see the fruits of a new management’s labors, says analyst Budd Bugach. After just two years of coming aboard, the managers are growing profit margins, retooling existing stores, and adding new stores in the U.S. and abroad. Bugach estimates the firm will earn $1.83 next year, giving it a P/E of 14.
JetBlue Airways (JBLU) is no flash in the pan, says analyst Jim Parker. With a superb management team, costs are just slightly higher than industry leader Southwest. A new fleet is efficient and low maintenance, a non-union workforce holds down costs and Internet ticket sales further reduce costs. Debt isn’t excessive. Parker projects three-year earnings growth will be a torrid 96% annually. He estimates earnings of $1.78 in 2003 giving the stock a P/E of 22.
Patterson-UTI Energy (PTEN), the second largest provider of contract drilling services, will prosper as oil and gas companies increase their drilling in the U.S., says analyst Marshall Adkins. Patterson is well managed and earnings should grow 35% a year, he predicts. He estimates earnings of 75 cents a share, giving the company a P/E of 42 next year.
Pioneer Natural Resources (PXD) explores for, produces and markets oil and gas. Analyst Wayne Andrews says the firm has reduced debt while making big finds of oil and gas in the Gulf of Mexico and off the coast of Africa. Despite the proven reserves, the stock trades at a remarkably cheap 3.5 times 2003 cash flow and 12 times earnings, he says. He estimates earnings of $2.27 in 2003.
Priority Healthcare (PHCC) distributes specialty pharmaceuticals, largely for and to people with chronic diseases. Analyst John Ransom expects rapid growth in its Hepatitis C and infertility franchises, as well as in hemophilia. These are high-margin businesses. The company should have 2003 earnings of $1.28, making its P/E just 18. Ransom predicts long-term 30% annual earnings growth.
Republic Services (RSG) is in the waste disposal business. It’s hard to get permission to build new landfills, so companies like Republic, which have them, can charge high prices to other waste companies. The company has the fastest growth rate of the big three firms in its industry, as well as the lowest valuation, says analyst William Fisher. He estimates it to earn $1.55 next year, giving it a P/E of 14.
U.S. Bancorp (USB), the nation’s eighth largest bank, is expanding rapidly. Problems digesting mergers have hurt recent results, but the firm is returning to fundamentals, says analyst Brad Vander Ploeg. He expects the company to earn $2.05 next year, make its P/E 10. He says it’s an 11% annual grower long-term.
WellPoint Health Networks (WLP), a managed care company, has been hurt along with the rest of its industry. Analyst Michael Baker thinks the industry has been punished too harshly and that WellPoint should spring back the fastest. He estimates 2003 earnings of $5.13, giving it a P/E of 14. He thinks the company will increase earnings 16% annually in the coming years.
