Students’ Top Stock Picks Emphasize Value and Dividends

Back in January of 2007, students at Brookline Adult and Community Education tackled the tough job of finding high quality stocks to buy at a reasonable price after a five month market rally. The group found the best buys among large, high-quality multinational firms, many of which are selling for historically low price to earnings ratios. Using Valueline as its starting point, the class chose nine favorite companies and compared them by industry, valuation, profitability, dividend yield, company size, five year earnings growth history, and balance sheet strength. After four weeks of basic research, the class voted for its favorites, aiming to create a diversified starting portfolio of just four stocks. And the winners were: Teva Pharmaceuticals (TEVA), Kimberly Clark (KMB), IBM and Nokia (NOK). Together, these four companies would make a wonderful value-oriented foundation for a stock portfolio that would be nicely diversified in terms of business type.

Israel-based TEVA, the group’s first pick, is the one of the world's largest generic drug makers. Like other generic drug makers, Teva has bumpy earnings, growing very rapidly when lots of big drugs go off patent, with lulls when growth slows. Teva was in a lull period and the stock had sold off dramatically. With a P/E of 14 and a relative PE of 0.77, Teva was cheap compared to the market. Looking at the stock's P/E and relative P/E since the company went public in 2000, we found that Teva was selling at a historic low, yet net profits remain strong and the company has 140 generic drug applications pending. Adding to the attraction, TEVA pays a nice dividend and had a 1% yield on the stock in January. Both Teva and competitor Barr were judged to be solid picks, but Barr recently did a big acquisition that is likely to take time to digest, whereas Teva's big acquisition of IVAX closed last year and integration is well underway. Our look at both companies, showed that it has always paid to buy these stocks after the stocks have sold off and during sluggish earnings periods. Our check of the stock charts on Teva suggested that it has reached a bottom and begun to firm after nearly a year-long slide.

Kimberly Clark, maker of Huggies disposable diapers, Scott towels and Kleenex was our dividend champion. Sporting a 3.0% yield, KMB has grown dividends at a 9% rate over the last 5 years, 6% over the last ten—well above inflation. Earnings growth here is slow but steady and with an A++ financial strength rating and truly global business, KMB is the kind of stock you love having in your portfolio for years, and that you especially love when recessions loom. Buying KMB is like having a sort of inflation-protected bond: the stock price appreciates very slowly and doesn't bounce around much, but the growing dividend provides inflation protection. We found that KMB was selling near historic lows in terms of P/E and relative P/E, a situation that has rarely lasted for long in the past. The stock has been gaining ground over the last few months as investors slowly return to large US company stocks. KMB is well positioned to benefit from growing wealth and improved living standards in emerging markets and is also a direct beneficiary of falling oil prices.

IBM is the world's largest supplier of information processing technology systems and services. The company's service business has been a standout performer, and IBM's strategy of helping businesses create integrated ‘end-to-end’ technology solutions has been a major success. The company's focus on sales in developing economies, such as Brazil, China, India and Russia is also paying off. With solid 9%–10% profit margins, a 1.2% dividend yield, accelerating earnings growth and a P/E ratio of 15.5, near historic lows, the stock had undeniable appeal. Despite the fact that business has been good, the stock has, like many large US companies, been stuck in a trading range since 1999.

Nokia (NOK), based in Finland, is the world's largest cell phone manufacturer. Nokia is particularly dominant in developing countries, and with little debt, lots of cash and an A+ financial strength rating, they have plenty of capital to expand in these fast-growing markets. With a 2.7% dividend yield, a 37% ‘payout ratio’ (the percentage of net profits paid out as dividends), and 33% dividend growth over the last 10 years, Nokia is the tech version of a dividend champion (and puts US competitors like Motorola to shame). Nokia's stock has been slowly recovering following the tech stock bust of 2000–2001, but it was still selling at historic lows in terms of P/E and relative P/E. Back in January, the stock broke out of an eight-month trading range on high volume and had started moving toward new highs.

As the group made its picks, the market was reaching new highs and we discussed the need for caution. One way for investors to protect themselves is to have a sell discipline in place. When you buy a stock, that very day, record the price you paid, calculate a percentage change on the downside that is outside your comfort level and record that price. Post it next to your computer right where you can see it every time you check your stocks. I will generally use a 15% loss as my signal to ‘get out and don’t look back,’ but many traders will say a 7–10% loss is a better target for most people who lack nerves of steel and stomachs of iron. If the stock hits that price, don’t think, don’t agonize, don’t look back, just cut your losses and share your pain with Uncle Sam. You’ll live to invest another day with your nerves intact!

Want to try your hand finding great stocks for the long haul? The next Brookline Adult and Community Education class on stock selection starts Tuesday evening, April 24. Click here to find out more.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Past results are not indicative of future performance. Outside sources used in this article are believed but not guaranteed to be accurate. Examples provided are for illustrative purposes only and are not representative of intended results that a client should expect to achieve.