Three Top Stock Picks (September 2012 Edition)
Occasionally, what are seemingly horrible businesses can be so shunned, unwanted and avoided that the price becomes irresistible. This edition of my three top stock picks includes several downtrodden names. These are two stocks and one ETF that have terrible relative strength and have become extraordinarily cheap in my opinion.
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:
Exelon Corporation (EXC, $36.46) a utility services holding company operates regulated utilities in Illinois, Pennsylvania, and Maryland. Utility companies have been good relative performers over the past year due to investors seeking safe income in a low-rate environment. However, EXC has been excluded from the party. The reason for this is EXC is considered a merchant utility, deriving a sizable portion of their income from selling excess electricity production on the open market, competing with depressed coal and natural gas in this space. However, the less volatile regulated side of their business should see growth and it is hard to see prices of natural gas and coal declining much further outside an economic calamity. EXC yields a healthy 5.7% and trades at 13.5 times next year’s expected earnings. I currently have a position in EXC.
Hewlett-Packard Company (HPQ, $16.84) provides computing and imaging solutions and services to consumers and businesses. Value Line has a nice report available at this link. They rate HPQ A+ for financial strength and in 3-5 years expect HPQ to earn $3.75 per share and trade between $40 and $60 per share. Along with the approximately 3% dividend, Value Line’s expectations would provide a very nice total return, although their projections could be wide from the mark.
HPQ seems to be considered a one trick pony by many investors, but they are far from it. They are well diversified in the tech area and are not as tied to the slowly dying PC business as is generally perceived. HPQ trades at about 4 times next year’s earnings and yields 3.1%. I do not currently have a position in HPQ.
Market Vectors Coal ETF (KOL, $22.53) invests at least 80% of its total assets in equity securities of U.S. and foreign companies principally engaged in the coal industry. Companies engaged in coal mining have been amongst the weakest relative performers in the stock market. Coal is a play on worldwide economic growth. Rising wealth and increased proliferation of consumer electronics assures a growing need for energy. Recent concerns about Chinese economic weakness have put a damper on all coal companies. A Chinese economic downturn is a definite risk but coal stocks appear to have discounted much of this uncertainty. I currently have a position in KOL.