Jeff Kosnett’s Eight Best Stock Buys for 2006

The Economy is Improving and These Eight Solid Stocks Will be the Best to Own in 2006

I leafed through Kiplinger’s today and found an article by Jeffery R. Kosnett titled “Stocks to own in 2006“. There was a subtitle that said “Our Picks are Riding the Improved Economy“. Just a little two page article with about three to four paragraphs on each stock but it was enough to pique my curiosity. Kosnett is highly qualified to be making these picks; he is senior editor of Kiplinger’s Personal Finance and specializes in writing about investments, economics and financial planning issues. Mr. Kosnett graduated from the Medill School of Journalism at Northwestern University and has completed a fellowship in management at Carnegie-Mellon University. Out of all the stocks out thereâÂ?¦.. What is there about these eight stocks that drew Jeff Kosnett to them?

Aetna Inc.
His first pick is for Aetna (AET at $90). I am particularly irritated by the concepts of managed care (and my doctor is also) but I can’t argue with how the growth opportunities for health insurance providers look, and Aetna is the third largest of the managed care entities. But that isn’t the whole story for Aetna either. The company started by organizing an annuity fund to sell health insurance and grew from there. The history of the company is a pretty straight forward growth story from the beginning. The guiding executives kept an eye on changing times and changing needs and tweaked the strategy of the company at all the right times and in all the right places. Today the company is looking ahead to the effect of health savings accounts, Medicare’s drug program, and high deductible low premium insurance plans to ensure the continued growth of the profit picture. Aetna, Inc. provides health care, dental, pharmacy, group life, disability, and long-term care insurance in the United States. It operates in three segments: Health Care, Group Insurance, and Large Case Pensions. Kosnett points out that the client base grew a healthy six percent in 2005 and that the company carefully controls the ratio of claims to premiums. From the patients and the doctor’s point of view that can be a very difficult thing but for the investor it makes very good sense because the claims for an insurance company are the expenses that effect the gains or losses in the profit column. It is rarely safe to invest based on your emotions. The fact that I do not like the concept of Health Maintenance Organizations does not effect my ability to see the value inherent in the ratios of Aetna Inc.

American Express
Kosnett’s second pick did surprise me (AXP at $50). I likely would not have picked Amex because of the splitting off of the fund management and financial planning arm of the business. But sometimes the best thing for a company to do is look at their best money maker and get rid of the part of the business that they are not as good at. Where I come from that might be called cutting your losses. That strategy is what American Express has done. They went back to their core business which is a world-class credit card business. Because Amex cardholders really don’t leave home without it, and spend thousands of dollars more every year than bankcard users do, it makes Amex much more profitable than the competition. Reorganization should never be considered lightly and is always cause for investor concern but in this instance Kosnett suggests it should lead to a higher return on equity. (The return on equity ratio is the measure of the average amount of money coming back from “money that was spent to make money”).

General Electric
Sometimes when financial analysts are assessing a company they find that the executive personnel are what make the company valuable. This is called human equity, staff equity, or sometimes managerial equity. Kosnett believes the dip by half in stock value that GE took after Jack Welch left was a result of losing this valuable human equity that was Jack. Although seeing a long time big conglomerate like GE take a downturn can be scary, the news is looking good again now (GE, $35). GE has health-care, train transportation, air industry, water and industrial machinery divisions which are all showing growth. Because GE is a multinational corporation it makes sense for the financial analyst to look at figures both in the US and abroad. The earnings growth rate is above the 10% mark and Kosnett thinks it will stay there for years. For investors interested in collecting yield as well as stock appreciation benefits the yield is 2.6%.

Granite Construction
Investing in public works construction right now is a good pick because Congress passed a six year, $286 billion highway funding bill. Granite (GVA, $36) has projects in 25 states and likely will expand. It is a little early to tell if hurricanes from the overly active 2005 hurricane season will directly benefit this company; but it will position Granite to take up the slack on more local projects as other construction companies head for the Gulf. When we look at the order backlog records (which have doubled in the past three years), and the fact that Granite also owns sand and gravel mines and manufactures asphalt we begin to see the extent of the demand for GVA product. The stock sells for 18 times the projected earnings for 2006 of $1.98 per share. A little tip about looking at companies and projecting future performance is to remember the human factor. If the employees are happy and supportive the company is in a good place at the Human Resources department. This cannot be achieved if there is trouble at the top because pressure will be felt at all levels when a company gets into bad financial straights. A sweet and telling note about Granite is that it has been named to Fortune’s list of 100 best companies to work for.

Ingersoll Rand
Ingersoll is incorporated in Bermuda and is not associated with the sinking US automobile market. The machinery it manufactures is independent of the vagaries of style changes and consumer trends. Ingersoll (IR, $39) does manufacture machinery for widely diverse markets such as industrial (supermarket size) freezers, road repair equipment, and major industrial security systems. Kosnett points out in his article for Kiplinger that most of Ingersoll’s business units are expanding by “double-digit percentages” and that profits are rising faster than sales. The published goal is to achieve a profit growth of 12% to 15% which will likely expand the Price to Earnings Ratio. Because the P/E ratio is a market value ratio that analysts use to gauge the future prospects of a company it demonstrates growth expectations. It does not take much of a jump to see connections with the rebuilding of the gulf in this company’s future.

Medtronic
Medtronic (MDT,$57) is a medical device manufacturing powerhouse whose stock is selling at 24 times the expected earnings per share that analysts are expecting over the next fiscal year. Because the price to invest looks so good (and of course medical equipment is a growing market) the earnings growth will likely reach around 20% in the 2006 season. It makes sense when the CEO (Art Collins) describes the outlook for Medtronic in terms of a pipeline of new products and notes that it is “the deepest it’s ever been”. Collins cites developments in the treatment of back pain, spinal injuries, diabetes and obesity; the products in these areas are highly valued by consumers. Medtronic can be distantly compared to Johnson and Johnson in the health care sector and though it is only about 1/3 the size of the giant Johnson and Johnson it is the closest rival to them. That tells the savvy analyst that Medtronic has the potential to maintain faster growth. Medtronic does business in more than 120 countries with world headquarters located in Minneapolis, Minnesota and regional headquarters in Switzerland and Japan; their reported revenue for the fiscal year that ended April 2005 was a sweet $10.055 billion.

Microsoft
Microsoft (MSFT, $27) used to be the poster child for prototypical growth stock. This is no longer true but even though the shares are off a disappointing 47% from their all time high in late 1999 the profits continue to grow. Key new products (the X-box 360, the Windows vista operating system, and a new version of Microsoft Office) are the engines driving the profit machine. It also helps a lot that the expensive legal wrangling with the SEC is finally at an end. Analysts are projecting a healthy 13% earnings growth for 2006 which shows up as the best since the year 2000. While we all know that performance is historical and does not represent the future possibilities: it is a pretty safe thing to go with the stocks in a company with what Kosnett calls the “iron clad balance sheet” which includes a sweet $4.00 per share in cash.

UPS
All of the business of the future will depend on shipping things. The company that manages that in the most timely efficient and safe manner will be on top in shipping industry growth. Earnings are expected to grow about 13% in 2006. Globalization, outsourcing and online commerce may be considered major problems in some sectors but it is what paves the way for UPS. The expanding economy means more things must be shipped and as the economy goes increasingly global UPS is ready to fulfill that shipping need with a fleet of dedicated trucks and airplanes. A trailer load of packages from the East Coast can arrive on the West Coast in a time frame ranging from 54 to 64 hours. The cost of fuel is not a factor for the company because they can collect surcharges to cover that unstable expense.

Financial analysts assess the viability and probabilities for a firm based on a number of measurable factors. Probably the most important and powerful assessment tool is the use of financial ratio analysis. Comparing and interpreting raw financial data gives the analyst the ability to identify strengths and weaknesses of the company. There are other factors that must be looked at as well and some of those factors are nearly invisible, are very subjective, or are based on long years of experience. When the savvy investor looks at companies like Microsoft and General Electric they don’t just look at the numerical data, they look at the personalities at the top. The personalities at the top of these eight companies have experience, education, passion, and persistence written large in their biographies.

While I may not have picked Aetna based on my aversion to HMO’s in general, or Granite Construction based on my lack of interest in construction topics I am still convinced that these are among the top picks for stocks to buy this year and to hold onto for the long run. It is, after all, not about emotion, or personal experience with the specific field; but the careful analysis of numbers, trends, markets, business environments and personalities at the helm that make these the right choices for 2006.

References:
Jeffery Kosnett, 2006, Stocks to Own in 2006, Kiplingers P. 40,41

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