CWS Market Review – December 17, 2010

I’m going to unveil the Buy List on the blog later today, but I wanted to give the CWS Market Review folks an advanced look, so here are the 20 stocks that will make up my Buy List for 2011:

Abbott Laboratories ($ABT)
Becton, Dickinson & Co. ($BDX)
Bed Bath & Beyond ($BBBY)
Deluxe Corp. ($DLX)
Fiserv ($FISV)
Ford Motor Company ($F)
Gilead Sciences ($GILD)
Johnson & Johnson ($JNJ)
Jos. A Bank Clothiers ($JOSB)
JPMorgan Chase ($JPM)
Leucadia National ($LUK)
Medtronic ($MDT)
Moog ($MOG-A)
Nicholas Financial ($NICK)
Oracle ($ORCL)
Reynolds American ($RAI)
Stryker ($SYK)
Sysco ($SYY)
Wright Express ($WXS)

Not surprisingly, next year’s list looks a lot like this year’s list, and that’s no accident. I only change five stocks, or just one-quarter of the portfolio, each year. My goal has been to show investors that you don’t need to trade a lot to beat the market.

This will be the fourth year in a row that the Buy List has beaten the S&P 500. Not only have we beaten the S&P 500, but we’ve done it with less risk as well.

The five new stocks are Abbott Labs ($ABT), Deluxe ($DLX), Ford ($F), Oracle ($ORCL) and JPMorgan ($JPM).

The five stocks I’m deleting are Baxter International (BAX), Eaton Vance (EV), Eli Lilly (LLY), Intel (INTC) and SEI Investments (SEIC).

Don’t take this action to mean that I don’t like the stocks I’m deleting; I hate to see some of these names go. I simply think the new stocks are better buying opportunities. For disclosure purposes, you can assume that I own any of the stocks on the Buy List, but I won’t buy any of the new names until January.

The Buy List for 2010 just hit a new record high for the year. We’re now up 14.99% through Thursday compared with 11.46% for the S&P 500 (dividends excluded).

With last year’s Buy List I made a fairly heavy bet on the healthcare sector which turned out to be a bad move. Fortunately, the Buy List is well-diversified so it didn’t hold us back much. The lesson is that as long as you hold high-quality stocks, you can overcome sector weakness.

I’ve looked at the numbers, and what can I say? I still like a lot of healthcare stocks. I got rid of Baxter and Lilly but I added Abbott Labs. In April, I wrote a blog post saying that Abbott was a good stock but that I’d like it better under $50 per share. Well, now it’s there.

JPMorgan isn’t an easy choice. The stock is cheap by most conventional measures but it’s been criticized by some for poor earnings quality. I still like what I see. Plus, I think JPM will give us a hefty dividend hike sometime in 2011.

Ford is the comeback kid. The company has had an impressive turnaround and I think it will get even stronger in 2011.

Oracle is certainly well-known. My only complaint is that I didn’t add it earlier. The company just had another good earnings report on Thursday.

The only new stock that you may be unfamiliar with is Deluxe. I admit this is an odd little duck. I like to have a few unknown and overlooked gems in the Buy List. Deluxe is a Minnesota-based company that provides services for small businesses. It’s a pretty solid business. The stock is a member of the S&P Mid-Cap 400. DLX has a market cap of $1.1 billion and the current dividend yield is 4.6%. Only a few analysts on Wall Street follow the stock which is how I like it.

One of the lessons I often tell investors is to not worry about what happens to the stocks you sell. Trust me; they’re not thinking of you. Unfortunately, the temptation is sometimes too great. I know this because all five stocks I ditched last year, Amphenol (APH), Cognizant Technology Solutions (CTSH), Donaldson (DCI), Danaher (DHR) and FactSet Research Systems (FDS), did very well this year.

Since I unveiled the Buy List in this eletter, I’ll keep the market commentary short, but there are a few key items that I want to highlight. One is that interest rates continue to rise, and they did so even more after this week’s Fed meeting.

The five-year Treasury is now over 2% which means that it has doubled since the election. The 10-year recently broke 3.5% for the first time since May. The 30-year has been as high as 4.62% which is the highest it’s been since April.

Once again, money is going out of bonds and into stocks.

Here’s what’s happening: There’s a reverse tidal wave going on through the yield curve. Yields bottomed out at the long end first and the bottoming has moved progressively shorter since then.

For example, the 30-year yield bottomed in August and the five-year bottomed last month. At some point, the three-month yield will start to move higher. I don’t know exactly when that will be, but the events that ought to proceed it have already happened.

Concurrently, there’s been some good economic news. In fact, some folks on Wall Street think the Q4 GDP numbers will be quite good thanks to the recent retail sales report and industrial production numbers. Morgan Stanley just raised their Q4 GDP estimate to 4.3%. A few months ago, not many folks saw that happening.

The market’s equation has been “higher yields equals stronger economy equals higher cyclical stocks.” The Morgan Stanley Cyclical Index closed Thursday at 1027. That’s an 8% rise over the last four weeks.

Next Wednesday, we’ll get another revision to Q3 GDP. The initial report showed 2% growth and it was revised up to 2.5% growth last month. That’s not very good, but I’ll be much happier if it’s a ramp to 4%+ growth for the fourth quarter. If growth comes in stronger than expected, the Fed could pull the plug on QE2.

Lastly, let me remind you that the market will be closed next Friday on Christmas Eve, but it will be open for business on New Year’s Eve. Sorry for all you Wall Streeters, but the change of years is too important to accommodate a closure.

That’s all for now. I’ll have more market analysis for you in the next issue of CWS Market Review!

Best – Eddy

Posted by on December 17th, 2010 at 7:15 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.