Stuart Chaussee

SoCal’s top five stocks for 2011

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Last year turned out to be terrific for stock investors and it followed an even stronger 2009. And, my last year’s SoCal Top 5 (Edison International, Mercury General, Northrop Grumman, Public Storage and Sempra Energy), did not disappoint. On average, all five holdings provided healthy profits for investors, including dividends.

That was not a difficult task because most stocks were positive for the year.

I think this year will prove much more challenging. The market has been on a torrid pace, and valuations are no longer very compelling. In my humble opinion, we are already significantly overvalued and the result could be a fairly sizeable correction at some point this year. So, this year’s picks are a mixed bag. Some are conservative holdings whose fortunes are not tied too closely to economic activity and some are indeed reliant on a strong economy to boost earnings but not extended in price. In short, I am hedging my bets. In addition, given the run we have had in stocks since the low in 2009, I think it makes sense for all investors to consider holding extra cash reserves right now.

The following selections should be considered as candidates to add to an existing portfolio – not as a stand-alone portfolio:

American States Water (AWR): Recent Price $34, Dividend Yield 3.0 percent: American States Water supplies water to more than 250,000 customers in Southern California through its principal subsidiary Golden State Water Company. It also provides electric utility services to over 23,000 customers in the Big Bear Lake and areas in San Bernardino County. This is an unexciting selection, I admit, but due to the recent price decline from nearly $40, I think today’s entry point is attractive. The dividend yield of 3 percent is also compelling in this low rate environment although dividend increases in recent years have been minimal. The company pays $1.04 per share in annual dividends. Earnings have been slowly improving since the recent peak in 2007 and should exceed the old high this year. The stock price, however, is well below the high of $46 set in 2007. Again, I like this selection not so much for its growth potential or upside in 2011, but more for its price stability and earnings predictability. Conservative income investors may find this selection appealing.

Amgen (AMGN): Recent Price $56, Dividend Yield – Nil: Amgen is the one-time high flying Thousand Oaks-based leader in biotechnology. The stock hit nearly $90 back in 2005, but it has completely missed the market’s comeback over the past couple years and given today’s price ($56), I think it represents a fairly conservative hold right here. Unfortunately the stock pays no dividend. It has a stellar balance sheet with $17 billion in cash and earnings have improved consistently over the past decade although shareholders have obviously not been rewarded. The stock ranks very high in price stability and the earnings are also highly predictable regardless of the direction of the economy. As most are aware, the company develops and manufactures medicines for illnesses. Its flagship drugs include red blood cell boosters Epogen and Aranesp, immune system boosters Neupogen and Neulasta and Enbrel for inflammatory diseases. It has also recently received approval for the osteoporosis drug Prolia. I think the solid balance sheet and the firm’s budget-conscious approach offer good long-term potential growth for patient investors.

DirecTV (DTV): Recent Price $42, Dividend Yield – Nil: El Segundo-based DirecTV has nearly 19 million subscribers in the U.S. and has been pushing growth overseas, most notably in Latin America. Earnings have steadily increased since 2004. Its average subscriber pays nearly $90 per month, evidence that its marketing to high-end households is paying off. My only reservation in including this company in this year’s SoCal Top 5 is the fact that the share price has been on a ridiculous pace the past couple of years, doubling from the $20 price back in 2009. It should be viewed as a speculation at current levels. If the stock market continues its recovery I would expect DirecTV to outperform. However, if the economy hits a difficult patch once again, I would expect the company’s stock price to come under pressure. DirecTV carries a lot of cash on its balance sheet, but it also comes with a high debt load. It is able to service its debt with healthy cash flow, however. Again, this selection is not for the timid, but if the market continues higher this year I would imagine DirecTV will keep pace and probably outperform most stock holdings due to its price and earnings momentum.

Edison International (EIX): Recent Price $38, Dividend Yield 3.3 percent: Edison International is the parent company of Southern California Edison. It is my only repeat selection from last year’s list. I view it as a fairly conservative pick that should hopefully retain its value if the overall market hits some tough sledding this year and it is also in a typically defensive sector (electric utility). If the stock market is strong this year, I would expect it to lag – again I’m looking at it as a defensive investment. Still, the utility sector could continue to attract money in 2011 if interest rates remain low, and the Federal Reserve has indicated that is on its agenda. The company supplies electricity to 13 million residents in a 50,000 square mile area of Southern California, excluding Los Angeles. The stock yields 3.3 percent and the board of directors has raised the dividend consistently since 2004. It paid $1.26 per share in dividends last year which was easily covered by earnings of $3.25 per share. This is obviously a sign of strength and a healthy balance sheet. At the current price, Edison is trading at a price-to-earnings ratio of 11. Again, I view it as a fairly conservative play with decent income and moderate price appreciation potential in 2011. In addition, it is still more than one-third below its old high set back in 2007. Income-oriented investors may find Edison International an attractive selection.

Mattel (MAT): Recent Price $23.75, Dividend Yield 3.5 percent: El Segundo-based Mattel is a familiar name to all and may be worth a second look. True, the largest toy maker in the U.S. has doubled off its low in 2009, but its stock price has languished when looking back some 10 or 15  years. Still, the healthy annual dividend of 75 cents per share has helped patient investors (although it hasn’t been raised since 2007) and one should note that profits are now at all-time highs, yet the company’s stock is still well below its previous peak. With the stock price and earnings now experiencing good momentum, investors may well continue to be rewarded in 2011. In addition, even in tough times the toy business can perform fairly well and this gives the company’s stock price a relatively high mark for stability. Moderate to aggressive investors may want to consider adding Mattel to an existing portfolio.

At the time of publication, Stuart Chaussee and/or his clients held positions in EIX, DTV and AMGN. 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. Pen

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