Three Top Stock Picks (October 2012 Edition)
My long-held belief is that it’s preferable to invest in stocks when equities as an entire asset class are shunned; in other words, going against the crowd. Stocks have been climbing for over 3 1/2 years. Obviously, the current environment is not the most opportune time to be buying stocks. However, individual stocks can be purchased reasonably cheap in relation to their future prospects or underlying assets on a fairly consistent basis. Although buying individual stock weakness is not as ideal as investing when the entire asset class is being discounted, it can, on occasion, create profitable opportunities.
Irrational hatred is a human trait that is manifested regularly in the stock market. Investment bargains are created when investors despise an industry or company because of temporary difficulties. Distinguishing whether a stock’s weakness is a temporary phenomenon is critical. Those companies involved in providing a basic human need are more apt to bounce back than those engaged in satisfying a fashionable desire.
Below are two stocks and one ETF that are currently unpopular with investors, and in my opinion, are reasonably cheap with regards to their underlying assets and future prospects and are thus my top stock picks for this month.
As always, stock picking is tricky and there is no assertion being made that the selections will be profitable. Investors should conduct their own due diligence before committing money to any investment. My belief is that the majority of individuals should stick to an asset allocation plan which includes widely diversified low cost indexed mutual funds. For those choosing to pick their own stocks it can be fun and rewarding; however it can also be very unpredictable and frustrating. Here is the link to last month’s selections.
Given the caveats, my top three picks this month are:
Molson Coors Brewing Company (TAP, $44.03) manufactures and sells beer and other beverage products. Their website shows several of the brands they produce (link). TAP is dwarfed by industry leader Anheuser-Busch Inbev (BUD) with 2011 revenue coming in at $3.6 billion versus $39.3 billion. TAP is moving into the emerging markets, including India and China, and recently purchased eastern European beer producer Starbev for $3.5 billion. TAP sells at a significantly lower PE than BUD (14 versus 19) and pays almost double the dividend (2.9% versus 1.5%). TAP may be the underdog, but the potential profit from the shares appears to offer an enticing risk/reward situation. Below is a chart comparing the share prices (BUD has been the much stronger relative performer over the past year):
Nordic American Tankers Limited (NAT, $8.95) is an international tanker company which owns and operates double hull crude oil tankers. NAT stock has been sliding over the past six months and sells at 50% off its 52-week high. The current yield is over 13%. Their debt/equity is less than 30%. Some shareholders have complained NAT has issued additional equity in overpaying for ships, which has been dilutive to the shares. This could mute a comeback in the stock once the world economy regains its footing (which is far from assured in an era of deleveraging). Shipping is required in the global economy and NAT should benefit if growth resumes, however, it should be considered a high risk speculation. The dividend is also at risk of being sliced.
WMS Industries Inc. (WMS, $16.65) is a leading company engaged in the design, manufacture and distribution of electronic and digital gaming entertainment and gaming machines for the casino industry. The performance of WMS stock has been a disappointment over the past couple of years. WMS now trades at a reasonable valuation in relation to its earnings (PE of 14) and book value ($16.01). The company has very little long-term debt. Governments are always looking at ways to bring in tourism dollars and jobs, so like it or not, the temptation to embrace gambling is undeniable for fiscally strapped localities. Walk into any casino and what you see normally see is a lot of retired (and probably not too educated) people playing the slots. Expect the number of this market to grow with the aging of the baby boomer generation. Industry competition is stiff (with International Game Technology, Bally Technologies, Universal Entertainment, and Konami in the mix), but the overall market should grow and present WMS with opportunities to resume their climb.
Disclosure: I currently hold positions in Molson Coors Brewing Company and Nordic American Tankers Limited.