Stuart Chaussee

Investments: California Top 5 Stocks

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Last year at this time I was very concerned – stock valuations were high and we had already had an unbelievable run that began in March 2009. My conservative approach was appropriate, as 2011 proved to be a difficult year for most investors. Indeed, the average U.S. stock mutual fund lost a few percentage points last year. In addition, global markets fared much worse than ours and experienced deep bear markets (declines of 20% or more). The U.S. market almost hit bear territory at one point, dropping approximately 19%. So, it’s hard to believe that 2011’s Top 5 Stocks somehow managed to average low double-digit total returns (price appreciation plus dividends). The picks for 2011 were American States Water, Amgen, DirecTV, Edison International and Mattel. Mattel and Amgen provided the bulk of the returns, but all ended in the plus column. I am going to parlay Mattel into 2012, but I have four new picks for you to consider.

For 2012 I have expanded my list of candidates to include all publicly-traded companies based in California. I am very constructive on stocks heading into 2012 and see the best opportunities abroad – Europe in particular – as stocks there may have already discounted much of the bad news and uncertainty. Our domestic market should also hopefully provide decent returns for investors and, if that is the case, this year’s California Top 5 should not disappoint. The following selections should be considered as candidates to add to an existing portfolio – not as a stand-alone portfolio:

Granite Construction (GVA): Recent Price $23.7, Dividend Yield 2.2 percent: Granite Construction is a heavy construction company based in Watsonville. It has 2,400 employees. It specializes in transportation construction and does large projects such as highways, dams, bridges and mass transit facilities. With Federal and state-level governments looking to increase funding in the future, Granite is well positioned. In addition, the company’s backlog of $400 million in the last quarter of 2011 will help support earnings (which have recovered after a very difficult period during the recession). The share price has lost nearly two-thirds of its value since the market’s peak in 2007 and I view this as an opportunity for somewhat aggressive investors. Again, with additional transportation and increased infrastructure spending, the company could be in position for a nice rebound in earnings. Note, the company does receive low grades for stock price and earnings stability, but given the share price decline in recent years, there is certainly plenty of upside if earnings improve.

Charles Schwab (SCHW): Recent Price $11.3, Dividend Yield 2.1 percent: Schwab is the largest retail discount brokerage firm in the U.S. It has approximately 13,000 employees and is based in San Francisco. Company revenues look to improve in 2012 after experiencing heavy declines during the recent recession. Obviously Schwab’s fortunes are directly tied to stock market and economic performance since it relies on investment activity to propel earnings. The long-term prospects for the company are solid and it is an interesting turnaround play. While the company is not a “blue-chip” in the sense of predictable earnings and price stability, it is a solid brand name with a huge client base. The stock price has been hammered since late 2008 – down 50%. If you like the prospects for a continued recovery in the stock market and the economy, Schwab could be a profitable play. Not for the timid, like Granite Construction (mentioned above), Schwab is also a fairly volatile stock. Still, for the aggressive-minded income investor, this could be a rewarding choice.

Chevron (CVX): Recent Price $107, Dividend Yield 3 percent: Let’s call this San Ramon-based large oil company the boring pick of the group. Still, boring can be quite appealing when the stock nearly doubles off its lows set in 2009. And, it has generally been on a steady upward trajectory during the past decade. No, I don’t expect returns anywhere close to what we have seen over the past couple of years, as earnings doubled, but I do like the company as an attractive play on an improving global economy. In addition, the growing dividend of $3.09 per share provides income investors with an added cushion and some cash flow. Indeed, with dividends equal to only 25 percent of net profits, there is plenty of room for continued dividend increases. The company earns high marks for price stability and has a very healthy balance sheet with $20 billion in cash and manageable long-term debt. The risk here, as with all major oil companies, is a large decline in demand and the price of oil – this would not bode well for Chevron. Still, with a stellar balance sheet and what may be a gradually improving global economy, this could be an attractive holding for moderate to conservative income investors. I would not look for outperformance from this stock, but it should hopefully keep pace with the overall market and provide plenty of cash flow too.

Mercury General (MCY), Recent Price $45.6, Dividend Yield 5.3 percent: Mercury General is a comprehensive insurance provider and a leading insurer in California. It has built a strong reputation providing auto insurance and boasts a customer retention rate in California of over 90%. This indicates that it not only provides cheap insurance, but customers are satisfied with its service and pricing. Mercury has been expanding into other markets, most notably, New Jersey, but its core business remains the California market. The stock boasts an above-average dividend yield of 5.3 percent annually. This high yield provides investors with a nice cushion in a flat or declining market and added performance in an up market. The stock has doubled off the lows in 2009, but is poised to return to the old highs of above $60. Given the strong recent performance of the stock, investors may be wise to wait for a pullback back to the $40 range before initiating purchases. Having said that, if the stock market moves higher to start 2012, I would think Mercury would participate and may not give new investors a chance to buy it lower. I don’t see huge upside at the current price, but it should track the market fairly closely and provide investors with an additional 5 percent annual dividend.

Mattel (MAT), Recent Price $28, Dividend Yield 3.3 percent: El Segundo-based Mattel had a stellar 2011, as far as price appreciation is concerned, and I am sticking with it in 2012. The largest toy maker in the U.S. increased earnings last year by approximately 15%, aided by strong international sales. The momentum should carry into 2012 and earnings are projected to increase by a similar amount. Stock repurchases and cost cutting have also helped the share price. Furthermore, the Board looks to further dividend hikes this year, which bodes well for income-oriented-investors. There is still a lot of upside potential in this stock as it continues to trade well off the highs recorded a decade ago and at an attractive multiple. It also provides a nice income stream for investors too, yielding over 3 percent annually. The company’s stock price is ranked above average for stability, but earnings are obviously vulnerable to any potential slowing in the economy. Still, in my opinion, the positives outweigh any negatives and moderate to aggressive income-oriented investors may want to consider Mattel for 2012.

At the time of publication, Stuart Chaussee and/or his clients do not hold positions in any of the California Top 5 2012 stocks. Holdings can change at any time. Under no circumstances does the information in this column represent investment advice or a recommendation to buy or sell securities.

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