Tis the season! With the NFL draft coming up this weekend, I thought it would be fun to add a little playfulness to the idea of sporting mock drafts and do something similar with equities. The goal in mind was to find 10 equities with the best potential to outperform the market over the coming year. In coming up with this list, I felt it necessary to take into consideration two key variables: 1) The market is up a cool 100% off the March 2009 lows and seemingly in cruise control and 2) We are nearing the seasonally weak “Sell in May and Go Away” period, which generally lasts until the latter part of summer – or the start of the new season! Should this play out as forecast, the market could see an intermediate top in the coming weeks (May-June), followed by a sideways to lower move throughout the late summer months of July, August, and possibly into September.
It is with this understanding and backdrop that I created a Top 10 list that is defensive in nature and leans heavily toward the large cap spectrum, a group that has largely been neglected during the bull run and one that is rich in cash, as well as valuation. I also believe that investors would be wise to add to each of these names on any significant weakness prior to the season opener in September;) So, without further adieu, let’s get to the picks.
And the first selection of the 2011 Equity Mock Draft goes to…
1) Cisco Systems, Inc. (CSCO) 4/25 Closing Price: $17.10 Dividend Yield: 1.40%
Summary: Having dropped roughly 40% in the past year, Cisco has become my favorite Old School, Large Cap Tech name looking out over the next 12 months. With $42B in revenue and a forward P/E (Price/Earnings) of 9.9, Cisco provides deep value for long term investors, while paying a small dividend to boot.
2) Microsoft Corporation (MSFT) 4/25 Closing Price: $25.61 Dividend Yield: 2.50%
Summary: Microsoft is undervalued and under owned. The stock is rich in value with $40B in cash and a forward P/E of 9.9. Sporting a 2.50% dividend, this is the ultimate “defensive” Large Cap Tech Stock.
3) Arch Coal, Inc. (ACI) 4/25 Closing Price: $33.82 Dividend Yield: 1.20%
Summary: Arch Coal recently beat earnings and raised fiscal year 2011 guidance. The company sees revenue growth of 15% and flashes an attractive forward P/E of 9. Could this be enough to push the stock over resistance at 36? With nuclear power under political fire and insufficient wind and solar resources, Arch Coal is an excellent play on electricity growth/demand. The #2 coal producer in the US also increased its future growth avenues through the purchase of a significant stake in west coast bulk storage terminal Millennium Bulk Terminals-Longview LLC. This move has “Asia” written all over it.
4) Clorox Company (CLX) 4/25 Closing Price: $68.54 Dividend Yield: 3.20%
Summary: Clorox is a sound defensive name that has benefited from a weaker dollar. They produce items that people need, so pricing power is good. The stock price looks good from a technical perspective as well. Buy the dips!
5) Yahoo! Inc. (YHOO) 4/25 Closing Price: $17.11 Dividend Yield: N/A
Summary: Yahoo has been punished repeatedly for poor execution over the past decade. And rightfully so, I might add. Recently, though, Yahoo has started to show signs of life. The stock looks technically sound, with 17.25 being the resistance. A break of this pricepoint, and Yahoo could be off to the races. The internet search name has a lot of “old school” brand equity as well, so be on the lookout for prospective buyers. Microsoft? Yeah, I’m sick of that one too.
6) Intel Corporation (INTC) 4/25 Closing Price: $21.94 Dividend Yield: 3.40%
Summary: Intel is another undervalued large cap tech stock. It is the driver of the “chip world” and has enough cash on hand to acquire new growth avenues. Intel recently beat earning estimates and displayed solid growth across business lines. Intel has $22B in cash and a forward P/E of 9.4. The dividend is nice as well.
7) iShares MSCI Japan Index Fund (EWJ) 4/25 Closing Price: $10.21 Dividend Yield: 1.36% (as of 3/31/11)
Summary: The tragic earthquake that struck Japan in early March may have jarred its markets, but also may have awoken a sleeping giant. Funds earmarked for recovery and rebuilding projects should assist GDP down the road, and may stir some healthy inflation. Note that the country has been mired in a deflationary, low growth slog for the past 20 years and Japanese markets, in turn, are down roughly 75 percent over the same period. As a contrarian, this should be reason enough to take a chance on Japan.
8) Merck and Company, Inc. (MRK) 4/25 Closing Price: $34.33 Dividend Yield: 4.50%
Summary: Another defensive name that is showing signs of life. It’s 4.50% dividend and 9.25 forward P/E place it securely in the value bucket. But, Merck, which prides itself on global research, doubled down on 2011 new drug development. This could provide a spark to growth, as well as its “needy” pipeline. More recently, Merck received early approval on its Hepatitis C treatment Boceprevir.
9) Colgate-Palmolive Company (CL) 4/25 Closing Price: $79.90 Dividend Yield: 2.90%
Summary: Colgate-Palmolive is an everyday consumer staple stock that pays a strong 2.90% dividend. Similar to Clorox, they produce items that people deem necessary for everyday life. The stock is nearing a fair valuation pricewise, but should provide shelter from any economic or market turndowns. Also, from a technical standpoint, the charts look good. Another good one to buy and add to on dips. The company is expected to grow earnings by roughly 5 percent in 2011 and 9 percent in 2012.
10) Chesapeake Energy Corporation (CHK) 4/25 Closing Price: $32.51 Dividend Yield: 0.90%
Summary: Chesapeake is a pure play on natural gas. The company and its CEO have been betting on a turnaround in the price of natural gas for some time… and that time may have come. Even billionaire Wilbur Ross has gotten into the natural gas mix. But note that this is also the highest risk/reward play in the bunch, so proper size allocation and risk management are warranted.
That ends our first annual Equity Mock Draft. Enjoy the real NFL draft this weekend, and happy investing.
Previously published as a blog by Minyanville.
Note that the author had a position in CSCO at the time of publication.
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of his employer or any other person or entity.