Top stocks for 2009 - still buys?
Stocks surged again in the third quarter. But have they gone too far too fast? And are my Top Stocks for 2009 still buys?
The third quarter brought another surge in stocks, as investors see signs of a return to corporate profit growth.
So much for that double-dip recession. The economy is doing just fine, thank you. As a result, most investors are playing catch-up, hoping to buy stocks before the run ends. While the little guy remains entrenched on the sidelines, the institutional investors, some of whom were aggressively short, are now buying stocks en masse.
It is this buying, which was mostly unexpected, that has allowed the major indexes to move significantly above the lows established in March.
In the case of my own Top Stocks for 2009 we have been ahead of the game from day one. Since the March bottom, the long recommendations have been on fire, recording a composite gain of more than 30% in 9 months. Considering the S&P 500 is up only 17% during the same period, our stocks are doing significantly better.
Here is an update on how five of our Top 10 stocks are performing including some thoughts on where we go from here. (To see the complete Update on my Top Stocks for 2009 here.)
Stock #1 - Jacobs Engineering
The Republicans will tell you that none of the stimulus money has been spent thus far. If that is the case, one would expect Jacobs Engineering (JEC) to be doing poorly this year, and that has certainly been the case. Shares are down more than 4% as of the end of the third quarter.
The bias on JEC is to the downside until the economy roars back to life or government spending becomes a reality. Shares are worth holding as there is talk of a second stimulus plan that perhaps might actually go to brick-and-mortar projects.
Stock #2 - Pulte Homes
For the most part, economic activity in housing was mostly positive in the third quarter, but there remains a healthy dose of skepticism about supply. Foreclosures are the biggest hurdle for the market. Increasing unemployment does not help matters. Prices have indeed fallen, but not far enough to really spur a boom in buying activity.
Until supply is absorbed, new construction will be dampened. Pulte Homes (PHM) was a Top Stock for 2009 as a long recession in housing was expected to end. So far investors are skeptical.
Shares of Pulte are flat for the year through the end of September. Patience here is really a virtue. PHM is worth holding, as the sector is likely to recover eventually. Unfortunately for those, including me, hoping for a 2009 rally, 2010 may be the year.
Stock #3 - Chicago Bridge & Iron
One of the biggest winners on the Top Stocks list has been Chicago Bridge & Iron (CBI). Shares have increased by more than 85% through the end of the third quarter on the strength of its niche construction projects.
liquefied natural gas terminals under construction, and the potential
for growth in nuclear power across the globe, CBI has been an
infrastructure play that has been a huge winner in 2009. Energy and most
anything tied to energy have been doing well this year, as we
transition from global contraction to global growth.
At the current price of $20 per share, CBI trades for under 13 times December 2010 earnings. There is more growth to come on CBI, and I would not be surprised to see some of that growth occur in the fourth quarter. CBI should be a double by the end of the year.
Stock #4 - General Electric
General Electric (GE) finally brought itself to life during the third quarter. The stock had been a laggard for some time as it struggled with a weak economy and troubles in its GE Capital unit.
The financial crisis made loans at GE Capital worth less, and frankly, difficult to value at all. Thankfully, the disaster in lending looks to be ending, as GE worked frantically to right its ship. After bottoming in March in the mid-single digits, GE has roared back to more than $16 at the end of the third quarter, nearly tripling in value. That impressive move, though, would be impressive if you bought shares in March. If you had started in GE at the beginning of the year, you would be just over break-even.
The point is GE has a long way to go before recovering lost value during the recession and financial crisis. Any future gains in the stock will have to be tied to earnings. GE will simply need to grow its way out of trouble. Given its history as a top innovative industrial powerhouse, I would bet on that recovery coming sooner than later.
Stock #5 - Chesapeake Energy
Of course, anything tied to energy has done very well in 2009. The huge natural gas company, Chesapeake Energy (CHK), fits that description.
Shares are up more than 75% in 2009, with more gains on the horizon. Oil and gas prices had been quite volatile in 2008, leading to a mispricing of assets across the category. Stocks like CHK were dirt cheap at the beginning of the year.
Today, looking forward, CHK is positioned to increase even further. The global economy is recovering, and with it, commodity prices are rising. In addition, the dollar has been in decline during the last several months, putting more pressure on prices. The benefactor of an inflationary environment will be commodity plays like CHK.
Of the stocks listed here, the energy plays make the strongest case for continued holding in 2010. Another double from current prices is certainly possible as economies across the world spring to life.
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