Brookline Adult Ed Students Pick Stocks for the Long Haul

“For some reason the whole business of analyzing stocks has been made to seem so esoteric and technical that normally careful consumers invest their life savings on a whim. The same couple that spends the weekend searching for the best deal on airfares to London buys 500 shares of KLM without having spent five minutes learning about the company.

Brookline Adult & Community Education (BACE) has long had a reputation for attracting the region’s best and brightest to its adult education classes. “Students come to us not just because of our great teachers, but because of the amazing sense of community at BACE and the incredibly diverse student body,” comments Craig Hall, BACE Program Coordinator. “It’s not unusual for life-long friendships to develop from our classes. And our teachers, even the ones who teach in Boston’s great universities, say our students are the smarter and more involved in what they are learning. They come because they want to, not because someone said they had to—it’s a big difference!”

So, to share the collective community wealth, here are the top investment selections from students in the BACE Spring 2006 stock-picking class and their reasoning.

Back in September, our group began three weeks of basic research on a half-dozen industry groups. The focus was on companies with a sustainable competitive advantage and well above average financial strength, whose stock could be held for the long term—5–10 years or more. With that aim, the class eliminated the weaklings and selected 11 favorite companies. To further narrow down the choices, students then compared their favorite stocks by creating a simple spreadsheet using data from Valueline. For each stock, they listed business, key customers, estimated earnings for 2006, price to earnings ratio for 2006, declared dividend for 2006 and current dividend yield, financial strength, as well as 10-year earnings growth rates.

Then the class voted for their favorites: Johnson and Johnson (JNJ) was the hands-down favorite and it would indeed be a terrific “anchor” for a portfolio, with its well-diversified healthcare business, superlative record of earnings and dividend growth and exceptional financial strength. Their next three top picks, McGraw-Hill (MHP), Sigma Aldrich (SIAL) and United Parcel Service (UPS) are also superb. Together, these four companies would make a wonderful foundation for a stock portfolio that would be nicely diversified in terms of business type, company size and even valuation.

McGraw-Hill is a large company, though smaller than JNJ. It’s a dividend champion with a history of slow, steady and very predictable growth. For a media/publishing company it has a particularly interesting and diverse business mix: beyond the flagship textbook division, S&P provides financial services, while the business division includes terrific newsletters, magazines and technical publications.

Sigma Aldrich is a mid-sized specialty chemical company that is absolutely dominant in the laboratory reagent market.  Its customers include universities, hospitals, pharmaceutical and biotech companies, and a host of other laboratory testing facilities around the world.  Much of SIAL’s growth is now coming from overseas as R&D goes global in India and Asia. SIAL has a superb track record of steady earnings and dividend growth.

United Parcel Service is the most economically cyclical pick in the group: it’s also a “contrarian” selection (one that goes counter to conventional market wisdom). While contrarian picks can be tricky, UPS is an example of a very good contrarian selection since it’s just economic worries that have dented the stock, not problems with the basic business. Everyone needs a few stocks that do exceptionally well when the economy is hot. UPS’s superb financial strength lets it ride out soft economic times and its efficiency and scale lets the company fly high when the economy picks up. When the group picked UPS it was down 13% from its 52-week high because management issued cautious “guidance” on earnings for the second half of the year and the market got scared about the possible effect of a recession on UPS earnings. Was management too cautious? Quite possibly—falling energy prices will be a major plus for this transport company and will help offset any slowdown in global growth. Even if earnings growth slows, it’s strictly a short-term issue, and the company will likely continue to prosper in good and not-so-great economies.

We also spent some time looking at stock charts. Stock charts are not fortune-telling — they are a way for even fundamental investors to listen to the collective voice of the market. On fundamental grounds, the class had liked second-tier pick Harley Davidson (HOG), but had some qualms about the strength of consumer spending and how durable Harley’s franchise would prove for the long haul. But when it came time for us to look at the charts, Harley Davidson proved a standout, showing a breakout on very high volume from a year-long price base. Enough reason to buy the stock? For a technician, yes; and for fundamental, long-term investors, enough reason to say “Hmmm—maybe HOGs do fly, and I should go back and see what I’ve been missing!” On the other hand, UPS had a chart that from a technical standpoint looked worrisome—enough to warn even long-term fundamental investors to wait and watch the market action carefully before buying.

Of course, as everyone in the class now understands, you should never buy just because someone says it’s a good stock. So, don’t take our word for it, do your own investment homework first!

Interested in joining the next Brookline Adult and Community Education class on stock selection? To learn more, visit the class web page.

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.