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The 5 best stocks for 2007

Nervous? Big-cap growth stocks not only provide protection in these uncertain times, they actually get an extra performance kick from volatility.

http://articles.moneycentral.msn.com/Investing/JubaksJournal/The5BestStocksFor2007.aspx

Snip:

I have fine-tuned this list every year since then on the anniversary date of the beginning of the portfolio by throwing out five stocks that I think have fallen short of my original description and replacing them with five others. This year I'm throwing out Alcoa (AA, news, msgs), BP (BP, news, msgs), Charles Schwab (SCHW, news, msgs), Dell (DELL, news, msgs) and Unilever (UN, news, msgs). I'm replacing them with four graduates of my Future 50 portfolio: General Cable (BGC, news, msgs), Qualcomm (QCOM, news, msgs), Stryker (SYK, news, msgs) and Valero Energy (VLO, news, msgs) -- plus a somewhat newer company, Google (GOOG, news, msgs), that has demonstrated a sustainable competitive edge even during its relatively short existence.


See below for detail:

Latest Market Update
October 23, 2006 -- 10:00 ET [BRIEFING.COM] Major averages are now trading in split fashion, spearheaded by turnarounds in some key sectors. Technology has inched into the green following reports that IBM (IBM 91.54 +1.06) has filed patent infringement lawsuit against Amazon.com...

The problem is 2007. The solution -- for investors -- is a specific kind of blue-chip stock: large-market capitalization, predictably strong earnings growth, a reputation as a safe haven in a risky market, and strong exposure to long-term global growth trends.

In this column, I'll explain why and, as part of my annual update of my long-term "50 Best Stocks in the World" portfolio, give you five names from that list that fit the bill right now. I'll be adding two of them to my 12- to 18-month Jubak's Picks portfolio as well.

I laid out some of the reasons that 2007 is such a problem for investors in my Sept. 15 column, but conveniently the International Monetary Fund (IMF) provided a concise summary of the high degree of uncertainty surrounding next year's economic results in its semiannual outlook on the global economy, released on Sept. 13.

Here's the most likely scenario for 2007, according to the IMF. Thanks to strong growth from China (projected at 10% in 2007 after 10% growth in 2006) and India (7.3% in 2007 after 8.3% in 2006), the global economy is likely to grow 4.9% in 2007. That would be just a slight dip from the 5.1% projected growth in 2006 -- certainly good news for investors globally.

The developed economies don't fare quite as well, but growth there still isn't anything to worry about. Growth in the U.S. economy, the IMF projects, will slow to 2.9% in 2007 from 3.4% in 2006. Europe will slow more rapidly, to 2% in 2007 from 2.4% in 2006, as will Japan, to 2.1% in 2007 from 2.7% in 2006.

Still, growth under this most likely scenario isn't anything to worry about. It's certainly strong enough to keep corporate earnings perking along just fine.

The spoilers: houses and oil
But then the IMF had to go and spoil the party by listing all the things that could go wrong. The souring U.S. real estate market could go from bad to worse, taking U.S. economic growth with it.

How bad does the housing slump have to get before it sends economic growth into a tailspin? A 5% decline in national average prices could push economic growth down 0.3 percentage points in 2007, Merrill Lynch calculates. That would take U.S. growth down to 2.6% in 2007. (Average U.S. housing prices were still inching upward over the summer, although that trend looks likely to falter soon.)

You can see that kind of volatility boost performance in the results from my "50 Best Stocks in the World" portfolio over the past 12 months. My "50 Best Stocks in the World" portfolio gained 8.56% in the 12 months that ended on Sept. 14, 2006. That was slightly ahead of the 6.96% gain on the S&P 500 ($INX) for the period.

But both the more "conservative" S&P 500 and the 50 Best, with their heavy doses of large companies with long-term growth records, beat out the 3.6% gain on the more aggressive Nasdaq Composite Index ($COMPX) in what was a very volatile 12 months for stocks. Going for blue chips worked this year, I'd argue, because of market volatility that sent some investors in search of safety. It didn't hurt that after years of modest performance, many blue chips were relatively cheap at the end of 2005.

Not just any ol' blue chip will do
To the degree that 2007 is also shaping up as a volatile year, I think blue chips will again outperform many more aggressive indexes and sectors. And blue-chip growth stocks will offer even higher relative outperformance, I believe, if 2007 turns out to be worse than the IMF's most likely scenario. Gains from these stocks may not set your heart aflutter in that case, but they're likely to be much better than you'll get from more aggressive segments of the stock market.

But I don't think you want to own just any old blue chip in 2007, either. There is a significant chance that growth, especially global growth from China (as the country continues its runaway growth in the run-up to the Beijing Olympics in 2008) and India (as the country's rapid growth in its service and information technology sectors continues to spill over into manufacturing), will be at the high end of projections in the most likely scenario. In that case, I think investors want more exposure to global growth trends than provided by the average blue chip.

Where do you look for this above-average growth potential? Among blue chips with exposure to the long-term growth trends in the global economy. Trends such as the rapid expansion of the middle class in Asia's economies, or the aging of the global population, or the increasing integration of the global economy itself.

Let's take those rather vague themes and cast them into the form of specific stocks from the "50 Best Stocks in the World" portfolio that I started in September 1998. The goal at that point was to put together a list of 50 blue chips that earned that often-too-easily-bestowed moniker because they had truly outstanding opportunities for global growth ahead of them over the next five or 10 years. And, equally critical in the original selection process, because they had a competitive edge that would allow them to seize the lion's share of that global opportunity.

I have fine-tuned this list every year since then on the anniversary date of the beginning of the portfolio by throwing out five stocks that I think have fallen short of my original description and replacing them with five others. This year I'm throwing out Alcoa (AA, news, msgs), BP (BP, news, msgs), Charles Schwab (SCHW, news, msgs), Dell (DELL, news, msgs) and Unilever (UN, news, msgs). I'm replacing them with four graduates of my Future 50 portfolio: General Cable (BGC, news, msgs), Qualcomm (QCOM, news, msgs), Stryker (SYK, news, msgs) and Valero Energy (VLO, news, msgs) -- plus a somewhat newer company, Google (GOOG, news, msgs), that has demonstrated a sustainable competitive edge even during its relatively short existence.

The process seems to work. Over the past eight years, the "50 Best Stocks in the World" portfolio has gained 41.7% vs. a gain of 27.8% for the S&P 500 and 33.8% for the Nasdaq Composite.

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HTMLPlain TextYour e-mail address:Learn more about newslettersSo what five stocks would I pick from this list right now to own in the core of my portfolio for a very uncertain 2007?

Three that I already own in Jubak's Picks, my 12- to 18-month portfolio: American International Group (AIG, news, msgs) for its competitive edge in meeting the fast-growing demand for financial products, such as life insurance, among the middle classes of Asia; Amgen (AMGN, news, msgs) for its competitive edge in developing new drugs for an aging population that demands to live not just longer but also healthier lives; and PepsiCo (PEP, news, msgs) for its competitive edge in bringing the great American combination of salty snacks and flavored bubbling (or still) water to the rest of the globe.

To those three I'd add these two stocks: Johnson & Johnson (JNJ, news, msgs) for its unique mix of consumer, pharmaceutical and medical devices and the company's ability to innovate in all these segments; and Procter Gamble (PG, news, msgs) for successfully making the very tough transition to a truly global consumer-products company. I will be adding these two stocks to Jubak's Picks with this column.

In my next column, as promised, I'll show you how you can complement this relatively conservative core by being a little more aggressive in the energy and metals sectors while still limiting your risk.

Updates
Buy Procter & Gamble

There are lots of good short-term reasons to own Proctor & Gamble (PG, news, msgs). The toughest stage of the integration of Gillette, an October 2005 acquisition, are behind the company. Raw materials prices are falling, or at least not climbing as fast as they did a year ago (although it's a tribute to management that in this environment the company was still able to expand operating margins by 0.9 percentage points), and the likelihood of market volatility in 2007 should give a boost to safe haven blue chips like this one. But it's one long-term trend that really attracts me to the shares: Procter & Gamble has finally become a truly global company that will be able to grow sales at double-digit rates for years because it can tap into the phenomenal growth of the middle class in the developing economies of Asia. In fiscal 2006, Procter & Gamble received 26% of its sales from developing markets, up from 23% in fiscal 2005. That's the first time in its history that the company received more than a quarter of sales from developing markets. Sales in developing markets grew by 35% year-over-year, thanks in good part, it's true, to the Gillette acquisition. But organic growth in these markets was well into the double digits. Over the past five years, Procter & Gamble has increased developing market sales at a compounded annual rate of 16%. Oh, and did I mention that the shares are cheap? Standard & Poor's calculates that the company trades at just a forward PEG ratio (projected price/earnings divided by projected growth rate) of just 1.3 versus a PEG of 1.7 for its peers in the consumer products sector. The shares also pay a 2% dividend. As of Sept. 19, I'm adding Procter & Gamble to Jubak's Picks with a June 2007 target price of $69 a share.

Buy Johnson & Johnson

Johnson & Johnson (JNJ, news, msgs) looks like its worked its way through the problems that drove shares down as low as $56 a share in February 2006. In the drug unit, which accounts for about 45% of sales, the company's pipeline of new products should start contributing to revenues in 2007, diminishing the effect of older products coming off patent. In the medical device business, which accounts for 38% of sales, the company expects to be able to generate 5% to 6% revenue growth, a come down from the heady 10% growth in the early part of the decade, but the segment's contribution to earnings growth will be healthier than the top line number indicates, thanks to operating markets that climbed to 28.4% in 2005 from 24.2% in 2004. The acquisition of Pfizer's (PFE, news, msgs) consumer healthcare business (which will add brands such as Listerine, Lubriderm, Benadryl, Sudafed, Nicorette and Visine) will add about $4 billion in revenues to Johnson & Johnson's consumer segment (now 18% of sales). For the long haul, I like the company's continued commitment to research and development, which accounted for 13% of revenue in 2005, and its record of successful product innovation. As of Sept. 19, I'm adding Johnson & Johnson to Jubak's Picks with a September 2007 target price of $74 a share.

New developments on past columns
The state of coal stocks is strong: Well, the state of coal stocks isn't strong now, but that was the headline on my Feb. 3 column in which I added Headwaters (HW, news, msgs) to Jubak's picks. Not much has gone right for Headwaters since then: Three of the company's 43 customers for its synthetic fuel from coal technology shut down production as federal synfuel credits evaporated with higher oil prices. But the tide may have turned (or at least there is a bit of good news interrupting the steady drone of bad news) with lower oil prices. On Sept. 13, the company announced that one of its former customers, Teco Energy (TE, news, msgs), would restart its synfuel operations. The catalyst is a drop in oil prices below the $69-a-barrel price that triggers a phase out of government credits. Teco Energy is one of Headwaters bigger customers and its return to the market could signal a pickup in the synfuels business if oil, as projected, stays below $69 a barrel for the rest of 2006 and into 2007. Too soon to get too enthusiastic, but as of Sept. 19 I'm raising my target price for Headwaters to $36 a share by July 2007 from the previous $35 by October 2006.

Metals boom has room to run: How low will gold go? Seems like everybody and their Aunt Tillie has an opinion. One of the most reasoned that I've seen comes from GFMS, a London-based precious metals consultant. In its outlook for 2006, released on Sept. 14, the company said that the 20% drop in the price of gold since May had been fed by fears of central bank selling. Under the Central Bank Gold Agreement, central banks had set a quota for annual sales of up to 500 tonnes by Sept. 26, the end of the agreement's fiscal year. Banks had, however, sold just 337 tonnes by August, noted GFMS. That left banks 167 tonnes short of their selling limit and triggered fears that the banks would rush to meet the ceiling in the remaining month. The end of September will bring an end to those fears and let supply and demand set gold prices again. Which would be good news for holders of gold. Mine production will be flat with 2005 levels this year and continue to lag behind demand. Selling of existing gold jewelry for scrap filled the gold demand gap as high gold prices fueled selling in countries such as India. Lower gold prices usually reduce scrap gold sales and gradually drive the price of gold back up. GFMS is calling for $700-an-ounce gold by the end of 2006.

Meet Jim Jubak at the Money Show
Columnist Jim Jubak will appear along with many other top investment professionals at The Money Show in San Francisco, October 16-18. Jim will hold seminars entitled "Making money from the commodities super-cycle" and "Dog stars: 10 hated stocks to buy in December," and he will speak on a panel entitled "Smooth sailing in a bumpy market."

Editor's Note: A new Jubak's Journal is posted every Tuesday and Friday. Please note that Jubak's Picks recommendations are for a 12- to 18-month time horizon. For suggestions to help navigate the treacherous interest-rate environment, see Jim's new portfolio, Dividend stocks for income investors. For picks with a truly long-term perspective, see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.

E-mail Jim Jubak at [e-mail].

At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: American International Group, General Cable and PepsiCo. He does not own short positions in any stock mentioned in this column.