How to invest

This is part 4 of a 4 part series looking at each of the companies selected and listed by Fortune in their 2009 Fortune 40: The Best Stocks to Retire On list.

Part 1 | Part 2 | Part 3 | Part 4

Small Caps and Foreign Value Stocks

The final 10 companies are comprised of small caps and foreign value stocks which round out the 2009 picks for Fortune’s Best Stocks to Retire on list.

In case you  haven’t noticed, I love small caps. I love looking under rocks that people walk by and then turning them over to see what’s underneath without worrying that my hands will get dirty.

There is also the age old comparison that small caps outperform large caps but that’s a boring old observation which I don’t find useful.

Small caps for this stock list were chosen based on the following criteria:

“candidates with positive free cash flow and at least an 8% return on assets, paying special attention to companies with little or no long-term debt.”

Compared to the 2008 best stocks list, the only company that made it through to this year is Tessera Technologies (TSRA).

Also, the consensus is that any long term focused portfolio requires international stocks for diversification.

“With the global economy still struggling but pockets of growth popping up, this year’s foreign portfolio plays both defense and offense. Diageo (DEO), Total (TOT), and Unilever (UL) return and should keep the portfolio stable amid global volatility. Generic-pharmaceuticals maker Teva (TEVA) replaces Big Pharma plays Sanofi and Novartis. Novartis has warned that it faces headwinds in Europe and emerging markets. Sanofi’s blockbuster blood-clot treatment Plavix will soon lose its patent shield, as noted, and at a P/E of 15, Sanofi’s shares are much pricier than those of Bristol-Myers (a P/E of 8), its partner in Plavix.” – Fortune

40 Best Retirement Stocks: No.31-40

1. Sykes Enterprises (SYKE)
2. Tessera Technologies (TSRA)
3. BP (BP)
4. Diageo (DEO)
5. Petroleo Brasileiro a.k.a Petrobras (PBR)
6. Koninklijke Philips (PHG)
7. Potash (POT)
8. Teva (TEVA)
9. TOTAL S.A (TOT)
10. Unilever (UL)

Tessera Technologies (TSRA)

Tessera Technologies develops and delivers miniaturization solutions that transform wireless, computing and consumer electronic products.

Its micro-electronics solutions enable smaller electronic devices and include semiconductor packaging technologies encompassing interconnect and substrates.

Its imaging and optics solutions provide camera functionality in electronic products and include image sensor packaging, wafer-level optics and wafer-level camera technologies, and image enhancement technologies

• Stock price as of July 15: $27.07
• Discounted Cash Flow Fair Value: $9.58
• Graham Value: $24.22
• Comments: In terms of cash flow, it isn’t that great. However, earnings growth has been huge. Not one for the value guys. TSRA went from $16 to $27 from my last post on the company.
  

Petroleo Brasileiro a.k.a Petrobras (PBR)

• Stock price as of July 15: $38.96
• Discounted Cash Flow Fair Value: N/A
• Graham Value: $80.60
• Comments: With cash flow being so irregular it makes it hard to put a figure on. There has also been a huge increase in maintenance capex that needs to be investigated. Could lead to big growth in the near future if the expenditure on capex is smart.
  

Best 40 Stocks To Retire On Full List

See below for the full list of all 40 stocks, its current price as of July 15 and fair values based on DCF and Benjamin Graham formula.

Want to know how I calculated the fair value estimates? Check out the DCF and Graham valuation spreadsheets.

Fortune 40 Best Stocks to Retire on Full

Disclosure

No positions in any stocks mentioned.

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This is part 3 of a 4 part series looking at each of the companies selected and listed by Fortune in their 2009 Fortune 40: The Best Stocks to Retire On list.

Part 1 | Part 2 | Part 3 | Part 4

Deep Value Stock Selection

“It’s easy to find beaten-down stocks these days. But unearthing battered shares that deliver steady earnings growth, pay dividends, and have little debt – well, that’s a challenge. That’s what Benjamin Graham sought and what our deep-value portfolio aims for too. We look for companies whose stock prices have been punished by short-term problems but whose fundamentals are strong and could reward patient investors with reliable growth.” – Fortune

My definition and Fortune’s definition of deep value is vastly different, but Fortune’s pick of deep value stocks were down 6.7% compared to the markets 30.1%. This is a tremendous feat so I’ll be keen to see how this years round of deep value selections will fare.

Except for two stocks, CSL & RBC, this group is completely new as the 2008 picks have outgrown their deep value status.

40 Best Retirement Stocks: No.21-30

1. Carlisle Companies (CSL)
2. Noble Corp (NE)
3. Regal Beloit Corp (RBC)
4. Valmont Industries VAL)
5. WW Grainger (GWW)
6. AAon Inc (AAON)
7. Exponent Inc (EXPO)
8. Lincoln Educational Services (LINC)
9. Merit Medical Systems Inc (MMSI)
10. Neogen Corp (NEOG)

CSL does still seem like an undervalued stock. You can also see how I calculate the fair values with the DCF valuation spreadsheets.

Carlisle Companies (CSL) Commentary

Although the FCF growth and CROIC for CSL is on the low side, the margins are consistent and has a good margin of safety which is important for any stock to be a worthy of holding in retirement.

Carlisle Companies Incorporated (Carlisle) is a holding company for Carlisle Corporation. Carlisle is a diversified manufacturing company, which manufacture and distributes a range of products. They operate in the construction materials, transportation products and applied technologies segment that includes the food service products.

• Stock price as of July 7: $24.09
• Discounted Cash Flow Fair Value: $35.27
• Graham Value: $70

Noble Corp (NE)

NE is interesting and I believe it to be a good pick.

Noble Corporation is an offshore drilling contractor for the oil and gas industry. The Company performs contract drilling services with its fleet of 63 mobile offshore drilling units located worldwide. This fleet consists of 13 semisubmersibles, four dynamically positioned drillships, 43 jackups and three submersibles.

Noble’s investment in growth in 2007 can be seen by the 300% increase in maintenance capex which resulted in close to a 300% increase in FCF when comparing with 2006 just before the growth in capex.

This is a direct competitor to ATW but looking at its financial position and portfolio of rigs, it looks like the company has plenty of room to grow in the deep water drilling industry. It has a good backlog of contracts as well as contracts with Petrobras which should provide a nice revenue stream.

I’m not into commodities or macro economics but I see oil prices rising sooner or later. I’m not going to get into a guessing game of when or to what price oil will go up to, but if oil remains above $60 per barrel, this price should be high enough to produce good margins and consistent profits for the drillers.

I originally looked into RIG, DO, NE and ATW when selecting my oil driller but chose ATW for its size and growth potential.

• Stock price as of July 7: $28.57
• Discounted Cash Flow Fair Value: $27.61
• Graham Value: $90.40

Exponent Inc

Exponent, Inc. is a science and engineering consulting firm that provides solutions to complex problems. As of January 2, 2009, the Company operated 21 practices and centers, including Biomechanics, Buildings & Structures, Civil Engineering, Construction Consulting, Ecological & Biological Sciences, Electrical & Semiconductors, Engineering Management Consulting, Environmental & Earth Sciences, Health Sciences, Human Factors, Industrial Structures, Mechanical Engineering & Materials Science, Statistical & Data Sciences, Technology Development, Thermal Sciences, Vehicle Analysis and Visual Communications.

• Stock price as of July 7: $24.41
• Discounted Cash Flow Fair Value: $25.45
• Graham Value: $48.06
• Comments: With increasing margins, great FCF growth and an equally impressive CROIC, EXPO looks to be a great company at a fair price.

NutriSystem Inc

This was a previous holding of mine. I previously bought at around $14 or so and sold when it hit $19 which was in the vicinity of my estimated intrinsic value. This was actually a stock that I was trying to enter and exit several times but I’m always slow when it comes to buying and selling so I missed my buy points on a couple of occasions and it hasn’t come down since. I don’t plan on buying NTRI unless it came down below $11 again. Nevertheless, it remains on my short term watchlist.

NutriSystem, Inc. is a provider of a weight management system based on a portion-controlled, prepared meal program. The Company provides a weight management program, consisting primarily of a pre-packaged food program and counseling.

• Stock price as of July 7: $14.20
• Discounted Cash Flow Fair Value: $19.01
• Graham Value: Earnings growth too high and fast to be reliable
• Comments: Growth seems to have caught up even before the recession. Sales, margins, returns, book value all declining.

Fortune 40 Best Stocks to Retire on Part3

Disclosure

I hold ATW at the time of writing.

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2009 Top 40 Best Stocks to Retire On

This is part 2 of a 4 part series looking at each of the companies selected and listed by Fortune in their 2009 Fortune 40: The Best Stocks to Retire On list.

Part 1 | Part 2 | Part 3 | Part 4

Bargain Growth aka Growth at a Reasonable Price (GARP)

Companies 11 through 20 are categorized as stalwarts or companies that can consistently create growth. This is the Peter Lynch style section of the portfolio.

Another Lynch precept is to invest only in companies with debt-to-equity ratios below 0.33. That requirement eliminated three of our 2008 holdings: 3M, McKesson, and Parker Hannifin all carry slightly too much debt. Meanwhile, two of our other stocks, Accenture and Microsoft, managed to generate more free cash flow last quarter, proving themselves to be what Lynch calls “stalwarts,” or consistent performers. They remain on our roster. – Fortune

Now let’s look at the next 10.

40 Best Retirement Stocks: No.11-20

1. Cisco Systems (CSCO)
2. Microsoft (MSFT)
3. Walgreen (WAG)
4. Gilead Sciences (GILD)
5. Mastercard (MA): Outside circle of competence
   
6. Thermo Fisher Scientific (TMO)
7. Baker Hughes Inc (BHI)
8. Becton Dickinson & Co (BDX)
9. Bristol-Myers Squibb (BMY)
10. Carlisle Companies (CSL)

Although I understand what Mastercard does I’m still uncertain about the valuation process and my abilities to get deeper into financials so I’ll let it be. If you look at the embedded spreadsheet at the bottom of the post, you’ll see that I didn’t highlight a single one out of this 10 because I don’t believe there are any bargains in this list as the categorization suggests.

BHI, BDX and MSFT were priced lower than my valuations but BHI is too inconsistent and unreliable to be included in any long term portfolio. BDX looks to be a good company but the margin of safety just isn’t there.

Microsoft (MSFT) Commentary

Regarding MSFT, I’ve never liked it as an investment. As a company, MSFT is always falling behind in everything they do. They are slow to react, slow to innovate and slow to adjust. Look at the romping they get from Apple with the mp3 players, Mac books is inching up and even iPhone is a better mobile product than Windows Mobile (although iPhone isn’t just a software). Apple’s growing fan base can’t be beat.

In the gaming section, Wii is the market leader. I can’t actually remember MSFT ever being a leader in the gaming section either. Nintendo had lagging console game sales for years but put a major turnaround through innovation something that I find is missing with MSFT.

Search and Bing? Still less than 10% while Google has over 75% market share. Younger, sleeker and innovative company just sped past.

But having said all that MSFT is still likely to grow at a consistent pace with Windows and Office, they just can’t seem to dominate anything other than what they were doing since their startup years.

• Current Price: $24.04
• Discounted Cash Flow Fair Value: $32.17
• Ben Graham Formula Value: $43.50

Walgreen (WAG) Commentary

WAG is a company that I’ve always like and is a prime example of a consistent and faithful company. It goes about its business with expert precision and execution. If you look at their margins for the past 10 years, it is solid as a rock. No veering off course into stupidity, which is why the company is so widely followed and constantly hovering around fair intrinsic value.

This recession is a good chance for entry points on WAG for people that have been waiting for years to get a consistently growing company.

• Current Price: $29.34
• Discounted Cash Flow Fair Value: $24.42
• Ben Graham Formula Value: $52.74

Thermo Fisher Scientific (TMO) Commentary

TMO is a new addition to the portfolio and it is a good pick.

Thermo Fisher Scientific Inc. (Thermo Fisher), incorporated in 1956, is engaged in serving science. It provides analytical instruments, equipment, reagents and consumables, software and services for research, manufacturing, analysis, discovery and diagnostics.

• Current Price: $40.39
• Discounted Cash Flow Fair Value: $39.76
• Ben Graham Formula Value: $40.75
• Comments: Margins, growth and return metrics are good. FCF growth has been very strong but wonder whether it can be sustained. Increased margins in FY 2008. Sales becoming flat.

It seems like its premium value has been removed and is now trading at fair value. Really does seem like a GARP pick.

Becton Dickinson & Co (BDX) Commentary

Becton, Dickinson and Company (BD) is a medical technology company engaged in the manufacture and sale of a range of medical supplies, devices, laboratory equipment and diagnostic products used by healthcare institutions, life science researchers, clinical laboratories, industry and the general public.

• Current Price: $70.70
• Discounted Cash Flow Fair Value: $82.04
• Ben Graham Formula Value: $138
• Comments: Has consistently produced plenty of FCF but FCF growth has been minimal, very good CROIC of 15%, steady growth in shareholders equity/book value, stable rising margins, debt to equity is consistently dropping, sales has been increasing.

Bristol-Myers Squibb (BMY) Commentary

Has a nice dividend of 6% but growth has been somewhat slow when it comes to cash. However, their ability to generate cash returns off invested capital is very good at over 15%. I’m not very interested in BMY myself but I do wish there was somebody that could analyze and value Mead Johnson Nutritionals (MJN).

• Current Price: $20.24
• Discounted Cash Flow Fair Value: $17.11
• Ben Graham Formula Value: $29.94
• Comments: FCF is positive most of the time but inconsistent as in not able to raise it steadily with some big losses in between. Average return metrics. Normalized earnings is also low and inconsistent. Margins and sales unstable. I wouldn’t consider as a retirement stock.

Fortune 40 Best Stocks to Retire on Part2

Disclosure

No positions in any stocks mentioned at time of writing.

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Continuing on by popular demand, this is part 1 of a 4 part series looking at each of the companies selected and listed by Fortune in their 2009 Fortune 40: The Best Stocks to Retire On list. View the original list on Fortune.

Part 1 | Part 2 | Part 3 | Part 4

The new 2009 Fortune’s Best Stocks to Retire On is not a complete makeover from last years pick of 40 stocks but there has been quite a number of changes. Enough to keep things interesting.

You can also refer to my commentary on the 2008 best stocks list to catch up.

Excerpts from the Fortune Article

Snippet on how the 2008 list performed.

The Fortune 40 delivered a 20.3% loss for the 12 months ended June 1… The S&P lost 30.1% during the same period… [our]record since inception in 2002: The Fortune 40 has averaged 10% annualized returns, nearly doubling the S&P’s 5.1%.

Best performers from 2008 selected companies.

Our star stocks last year included smokeless-tobacco company UST (acquired by Altria), which returned 25.9%. Then there was National Presto, which manages to sell both ammunition and diapers, among other disparate products. It’s an unlikely combination, to say the least, but one that is apparently impervious to the economy. Investors rewarded National Presto with a 17.6% gain last year.

Worst performers from the stock list.

Our worst decliners were two small-cap recommendations pummeled by the collapse of energy prices. Offshore construction and engineering concern Global Industries plummeted 55%, and natural-gas driller Grey Wolf sank 57% before being bought in December. (Quite a contrast to how my small-cap picks have performed)

Growth and Income Selection

The first 10 companies that make up the list is part of the growth and income section of the portfolio. As the Fortune portfolio is a bag of companies fit for retirement, Fortune has categorized their portfolio positions according to each of the four strategies.

The growth and income companies are blue chip companies based on Jeremy Siegel’s book The Future for Investors.

Siegel’s stock-picking philosophy emphasizes established companies with proven products, consistent returns, healthy long-term earnings growth, and high dividends. Perhaps they aren’t the glitziest names, but “boring” can be another word for “sturdy,” and that’s appealing these days.

CL,USB and ITW were dropped this time around and replaced with MCD, FPL and WMI.

40 Best Retirement Stocks: No.1-10

1. Abbott Laboratories (ABT)
2. Coca-Cola Co (KO)
3. General Mills Inc (GIS)
4. Johnson & Johnson (JNJ)
5. Procter & Gamble Co (PG)
6. Waste Management Inc (WMI)
7. McDonald’s Corp (MCD)
8. FPL Group (FPL)
9. Accenture Ltd (ACN)
10. Chubb Corp (CB)

Once again, I’ll be passing on Chubb as I don’t have a good understanding of insurance companies and their financials.

This time around, the price discrepencies are quite small but the solid picks are JNJ, PG and the new addition, MCD. With most of the companies, it has been less than 2 months since I put up the 2008 Fortune Best Retirement Stock list and blue chips won’t change within 2 months, so the commentary is the same.

Johnson & Johnson (JNJ)

Johnson & Johnson stock analysis and report

Johnson & Johnson is engaged in the research and development, manufacture and sale of a range of products in the healthcare field. Johnson & Johnson has more than 250 operating companies. The Company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics.

• Current Price: $56.60
• Discounted Cash Flow Fair Value: $70.16
• Ben Graham Formula Value: $98.37
• Comments: increase in debt-equity, good margins, good FCF

Procter & Gamble (PG)

The Procter & Gamble Company is focused on providing branded consumer goods. The Company’s products are sold in over 180 countries around the world primarily through mass merchandisers, grocery stores, membership club stores, drug stores and in high-frequency stores, the neighborhood stores, which serve consumers in developing markets

• Current Price: $51.75
• Discounted Cash Flow Fair Value: $68.75
• Ben Graham Formula Value: $102.49
• Comments: good FCF, steady margins, super CROIC, decrease debt, outstanding

McDonald’s Corp (MCD)

McDonald’s Corporation franchises and operates McDonald’s restaurants in the food service industry. These restaurants serve a varied, limited, value-priced menu in more than 100 countries globally. The restaurants are operated either by the Company or by franchisees, including franchisees under franchise arrangements, and foreign-affiliated markets and developmental licensees under license agreements.

• Current Price: $57
• Discounted Cash Flow Fair Value: $68.75
• Ben Graham Formula Value: $105.43
• Comments: Generates cash, earnings with consistent and high returns. Market leader, still growing consistently.

2009 Fortune 40 Best Stocks to Retire on Part1

Disclosure

No positions of any stocks mentioned at time of writing

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