OK, so my ancestry is mostly Swedish, and I can’t help but think of a smorgasbord when I see the latest email out from Louis Navellier for his Blue Chip Growth newsletter. If you don’t know what a smorgasbord is, it’s basically a big buffet layout of Swedish foods, often served at holidays.
And like a smorgasbord, Navellier’s touting a wide variety of dishes … some of them will probably be a bit tough to swallow, like good ‘ol lutfisk, and others will be as tasty and pleasing as good ‘ol Janssons temptation or Swedish meatballs. The trick is, can you tell which is which?
Let me lay out the dishes for you, and you can make your selection if you like.
Now, let me be clear: Louis didn’t provide many clues here, so some of these are guesses. That’s not the way I like to do this, I prefer when I can apply the Gumshoe’s Thinkolator to bring you some more certainty, but I thought it was still worth exploring them a bit.
Louis essentially tells us that we should be looking for the highest quality growth stocks, and that many of them look cheap now — he specifically mentions that he’s looking for great cash flow, high and rising margins, and earnings surprises.
So, without further ado …
“Our top high-growth blue chip helps cancer patients live longer, better lives. It’s got a ground-breaking product line, ready to go, and the growth profile is glorious—there’s just no other word for it.
“It reports tomorrow [as in today, for us]. In the last 4 reports, it has come in way ahead of expectations, and the stock has reacted with a 7% – 10% jump of joy. Buy it now.”
The best match for this one is likely to be Intuitive Surgical (ISRG), the maker of the da Vinci surgical robot — they report after the close today, and they have a history of often beating earnings estimates, and have been a growth darling for years. I can hardly type because I’m so busy patting myself on the back for selling ISRG around $300, but if I bring that up then I have to tell you that the stuff I bought with that cash is down at least as much as ISRG stock — it’s currently just a hair under $200.
There are other potential stocks that could match this — Baxter International reports today, too, and has a slightly better “grade” in Navellier’s system, but isn’t paritcularly focused on cancer (ISRG’s earnings growth has been largely about their huge market share in prostate cancer surgery). Gilead is also reporting today and has a nice growth profile, but they sold their cancer business a while back.
Intuitive Surgical is a stock I’d love to get back into if they get cheap — and they’re getting pretty close to that. They trade largely based on their sales of new da Vinci systems at this point, but they have a strong and growing cash flow from the sales of the semi-disposable tools that are used by the robot, and from service contracts. At some point the growth will plateau, but they should remain a very profitable company — the question is, will the plateau of adoption of the surgical robot come in the next couple years, or do they have many more years of dramatic growth ahead? They still have essentially no competition in this niche.
Oh, and these machines are expensive — $1 million+. So if hospitals can’t raise the money to buy more of them, they could easily take a short term hit … ISRG doesn’t depend on debt, but their customers certainly do. Demand for the machines continues to look pretty robust to me, but I haven’ been watching this one very closely of late. It’s as cheap as it’s been in quite a while, but it’s only cheap if you believe the growth will continue.
“This cereal stock pretty much guarantees you market-beating returns for the next decade. Plus, as people skimp on eating out, they become bigger users of discount coupons. This is where our cereal company absolutely dominates.
“PLUS, wheat and corn prices are down—which sets ups up for a nice surprise in earnings season. It trades at 16 times earnings, too—so you snap up a bargain.”
Going just from those clues it could be either Kellogg (K) or General Mills (GIS), and both are given an A rating by Navellier’s portfolio grader service. Given his past writing about this sector, I’d be fairly certain that he’s talking about General Mills. Those two companies have very similar financial profiles, but General Mills is arguably a bit more diversified and value priced at the moment. If you want to go down the chain in the same sector, you could also look at a smaller company like Ralcorp, which owns Post and makes store brands (and owns a big chunk of Vail Resorts for some reason), but if you’re looking for steady blue chip growth you’d probably be happier with GIS or K.
Certainly nothing shocking here, when the economy goes South lots of folks retreat to the food companies … and they do get a nice boost, one expects, from falling commodity prices, but the cost of corn matters almost not at all (the box, and the transportation of that box, and the marketing, all cost more than the few cents of corn that goes into a box of Corn Flakes). It’s probably true, though I haven’t researched this, that the price of oil has much more to do with the cost of a box of cereal than does the price of corn or wheat.
OK … next one?
“Best ‘SAFE HAVEN’ Blue Chip”
“We’ve seen: Anything can happen. And we’ve learned: Anything will happen. So what’s the stock that will stand tall and strong through the fiercest hurricane?
“This HAS to be a company that’s grown through every conceivable threat, acquired a seasoned management team and has diversified across the globe wisely, without losing control of quality. Many claim this crown, but only one blue-chip is undisputed king.
“Especially look at its stock price during this crisis: from the low $40s a year ago to the mid $50s today. During this crisis, it has totally revamped its marketing, to promise consumers a better lifestyle in troubled times. It’s brilliant and sales show: It hits home.”
Again, the clues are not exactly thick on the ground here — but from that, the best fit is probably Wal-Mart (WMT), there are very few companies that have gone from the low $40s to the mid-$50s in the last year, unfortunately (though almost every big consumer staple blue chip is priced in or near the mid-$50s, so it’s hard to be certain). Another fairly close candidate would be McDonald’s, though you have to go back more than a year for prices in the $40s. And Wal Mart has indeed revamped their marketing in recent months, and the share price has gone up as investors speculate that they will be the last store standing when consumers have no cheaper place to go to (except maybe the dollar stores).
Wal-Mart has not been a fabulous performer, and relative to their extremely strong growth in their early years the shares look a little pathetic … but relative to the rest of the stock market today it looks much better.
Wal-Mart and McDonald’s both get an A from Navellier’s quantitative system, by the way.
He’s also selling us a high yield blue chip …
“Dividends are back. Investors are remembering the old truth: 97% of your total returnon your investment in your lifetime will come from dividends. So what’s the best?
“Our top blue chip offers a fat 12% yield. That’s THREE TIMES what a 10-year Treasury offers!
“Plus, net profit in this specialty steel mill just soared 85%. PLUS, asthe dollar gets cheaper, our profits just keep getting better.”
The best match I can find for this one is a Brazilian company, Gerdau (GGB). Like it’s fellow Brazilian steel company, Companhia Siderurgica (SID), it’s a B in the Navellier grading system, and the trailing yield is right around 12%. Gerdau comes closer to matching that profit number, however.
Gerdau has reported some good earnings growth in past quarters, but Brazilian companies have been taken out behind the barn and put out of their misery of late — it’s down about 80% from its Summer highs of around $25, you can pick it up today for $5 and change if you’re interested. Many Brazilian firms have been severely punished by the recovery of the dollar because of their currency trading and hedging, I have no idea whether Gerdau is in that boat, and I know very little about the company.
This one is certainly a bit of a guess — there aren’t many high-yielding steel stocks at the moment, but this one does not match Navellier’s net income numbers precisely, at least according to the numbers I’ve seen.
And one more — are you tired yet?
He says you should buy this one IMMEDIATELY, and that this is his “Best Blue Chip to Buy First.”
“My top Trigger stock this week is a video game company with 10 million subscribers on a monthly billing cycle. As recession looms, this industry has caught fire. Honestly it looks like games are more than “recession resistant”—they appear to THRIVE on an economic slowdown!
“This blue chip gamer is about to GUIDE HIGHER—right ahead of earnings. Last quarter, under very similar circumstances, the stock jumped 25% in 10 days. That’s a risk-free 25% gain!”
This pretty well has to be Activision Blizzard (ATVI), the company behind Guitar Hero and World of Warcraft (which did surpass the 10 million subscriber mark early this year).
If you think this quarter is similar to last quarter anywhere in the stock market, I’ve got a portfolio to sell you — you’ll have to pay my mark to model price, of course, since I’ve personally decided not to use mark to market accounting for my holdings. They have had some nice performance after earnings in recent quarters, and they certainly have some of the hottest game franchises. The financials are a little confusing because of the merger between Activision and Blizzard less than a year ago, but it looks like analysts are pricing this at about a PE of 16 based on fiscal 2010 earnings projections of 75 cents or so, which will start for them next Spring.
If you believe that games are recession resistant, this might be one that’s worth a look — it is more profitable and has probably a better portfolio of games than Take Two Interactive, and it’s certainly performing better of late than the giant of the industry, Electronic Arts, which has been mired in a search for growth for the last year. Or you could always take a flier on the big companies that compete with World of Warcraft in China, where multiplayer online games are still huge — some of them, like NetEase, have even managed to stay afloat in the China selloff, others — like Shanda and The9 — have not been so lucky.