Thursday, November 29, 2007

Final Stock Picks and What I Plan On Doing With Them

So, at last I have a handful of companies that can be invested in. Eleven, to be exact. Well, more like eight actual "investment grade" stocks + two strong candidates + one speculative play.



Capital One is the speculative play, which as tempting as it may seem I will probably pass on. After reading a Fortune article pointing out that UK has been ahead of us by about 18 months for the past several year as far as the economic conditions go and besides the subprime mortgage that they've experienced two years ago, they've also had a problem with credit card default rates afterwards. When I thought that Capital One's stock was beaten down because of its subprime exposure, I figured that extent of the downward pricing pressure on the stock was uncalled for, but now it almost seems justified if U.S. economy will keep on following UK's behavior as it has so far.

Having said what I said above about potential credit card problems, I'm still bullish on Bank of America. It'd be a shame not to snag one of the financial companies at these beaten down share prices and this company seems to be in the better position than others with an excellent balance sheet and a limited exposure to the subprime mortage mess.

Two stocks that I'm undecided about right now are Walgreen (WAG) and 3M (MMM). I've only done financial analysis on them and not the full analysis, have not really looked at their 10-K statement yet. Walgreen has a higher margin of safety and a solid track records of revenue and profit growth. 3M, on other hand, seems to have these cyclical declines all the time and although the margin of safety is only 18%, the company, it seems to me, is likely to bounce back up quicker than Walgreen if previous stock price history is any indication. So, I might take a position in both, with 3M being the smaller investment.

Out of the remaining eight picks, only two have margin of safety (MOS) under 30%: Medtronic (MDT) at 27% and Coach (COH) at 22%. Medtronic is close enough to the 30% benchmark, while a good price for a position in Coach might be worth waiting for. Coach went up 12% since I analyzed it three weeks ago, but I'm sure it will go down before keep on going back up.

So, with the exception of Coach, other seven picks (including MDT) can be invested in. What I'm waiting for right now is the Fed meeting on December 11th, which will determine what my actual final pick will end up being and the size of positions I will take in each of those stocks. What I'm concerned about is Fed's seeming unwillingness to cut the interest rate further. If the rate is not cut once again, there is a strong belief among reputable economists, such as Ed Yardeni, that such action (or rather inaction!) will induce a recession with a significant economic downturn. I figure it's worth waiting another two weeks to see what's happening, but I would prefer to make the trades before the end of the year, this way I'd have an option of taking long-term capital gains by the end of 2008 if my tax situation will be suitable for such a move. Obviously, the trades are not made for tax reasons alone and I will most likely buy those stocks anyway, but might as well do it at the time that might be tax-advantageous in the future as well.

Here is a list of stocks listed in the spreadsheet above linked to their analysis pages:

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