Markets & Finance

Five for the Money's Best Stock Picks


From ETFs to old, reliable large caps, from IPOs to the discreet charm of green shares, here are some of our best calls—plus a few dogs

For a bit more than a year, BusinessWeek.com has published a weekly Five for the Money column to help readers spend and invest with greater insight. Oftentimes the column picked a category and took some time looking at promising investments in that niche. Topics spanned the gamut from stocks in specific sectors to the health of companies' balance sheets and management. Some of the most popular looked at low-price stocks. The stories were consistently widely read, but unfortunately, not too many readers let us know whether an investment paid off or if the story catalyzed investments.

So as an end of the year bonus, we decided to investigate our own record. At the end of Five for the Money's first full year, we serve up our best, and a few of the worst, picks.

1. Diversify with ETFs.

With investing opportunities sprouting like kudzu, how can a regular investor get in on the action? One way is exchange traded funds, which make some of the more exotic options as accessible as trading a stock. "Spread Your Bets on ETFs" called a few nice gainers. Since this story came out, Vanguard Total Stock Market VIPERs (VTI) has made impressive gains, closely tracking ascendant benchmark indexes. VTI is a bet that U.S. stocks markets will perform well, and if you timed it right, you should be ahead of the game.

But as global stock markets have made even more striking gains, iShares MSCI EAFE Index (EFA), which tracks markets in developed foreign markets, has outperformed U.S. indexes. And the iShares Vanguard Emerging Markets Stocks Vipers (VWO) covering developing emerging markets is up about 30% in the last six months. These stars more than make up for the iShares Lehman Aggregate Bond (AGG) ETF, which is up but has lagged behind the major stock indexes.

2. Steady large caps win the race.

When "Stocks to Sock Away" came out in the dead of August one reader snapped: "This has got to be one of the most uninspired group of stock picks I have ever seen." Fair point. These five stocks, chosen largely for their strength in paying dividends, included three giants: Microsoft (MSFT), Johnson & Johnson (JNJ), and Coca-Cola (KO), as well as lesser-known outfits.

We also picked Microchip Technology (MCHP), a maker of miniature computers present in a wide variety of common appliances, and real estate investment trust Realty Income (O). They may not sound sexy, but since the story came out, a basket of the five picks would have outperformed the Standard & Poor's 500-stock index while continuing to pay out hefty dividends. Five for the Money had fun searching for little-known gems, but sometimes strong returns don't require digging. Let's leave inspiration to Hallmark.

3. Baby stocks can grow up.

A recurring popular theme was finding inexpensive (not cheap) stocks that had the potential to bring in strong returns. In "Baby Stocks With Room to Grow", the caveat was always that stocks under $10 carry big risks, so readers shouldn't get too excited about the inexpensive thrill of buying 100 shares for $750.

Despite the downside built into these stocks, a few of them have done quite well. Since May, Playboy Enterprises (PLA) and Taiwan Semiconductor Manufacturing (TSM) have both rocketed beyond the $10 per share benchmark.

A follow-up story featured a few more that have crossed the psychologically significant milestone, including Lions Gate Entertainment (LGF) and Nuance Communications (NUAN). As a whole, it should be said that many of the stocks discussed idled or slipped into forbidding sub-$5 territory. So don't put all your eggs in small or low-priced stocks, because you could easily end up with some rotten ones.

4. IPOs strut the red carpet.

This year was a strong year for initial public offerings, so Five for the Money won't take too much credit for a few hits. In June, "Five IPOs That Are Worth a Look" expected strong results from South Korean e-commerce outfit GMarket (GMKT), the unprofitable stem-cell company Osiris Therapeutics (OSIR), and IT contractor Stanley (SXE)—all of which have turned in respectable performances.

Later in the year, we revisited the IPO theme as new filings emerged and the market looked ready for another hot streak. Of those discussed, tech outfit Acme Packet (APKT) has done especially well since its October debut. Meanwhile, defense contractor SAIC (SAI) hasn't blown investors away, but as a mature company it has traded consistently above the offer price, as analysts expected.

Other picks flopped, such as ethanol outfit Hawkeye Renewables and Web host GoDaddy. Neither company went public.

5. Green schmeen.

In April, a column discussed how environmental concerns about corporate practices don't necessarily weigh on share prices. Sure enough, the year has born out the thesis. Whether a company is "green" is not always clear. Companies mentioned in the column like General Electric (GE) and DuPont (DD) have won plaudits for innovative, environmentally friendly products even as pollution incidents from their past continue to plague them.

Exxon Mobil (XOM), on the other hand, is a perennial target of environmentalists since the Valdez spill. What all these companies have in common is that their stocks have climbed in recent months. Paint outfit Sherwin Williams (SHW) has also had a strong year, while peer NL Industries (NL) trailed behind. Being green and making green are clearly not interdependent.

Plus: Bad Calls

O.K., not every call Five for the Money made panned out into investor gold. A few notable disappointments were "Greener Pastures in Tech", where the small companies making environmentally friendly products have thus far disappointed investors. On the flip side, "Knowing REIT from Wrong" was bearish on a handful of real estate investment trusts that have as a whole performed well, thanks partly to merger activity and attractive dividends. All in all, we found some nice winners in 2006, and will keep covering emerging themes in the new year.


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