Two Stocks for the New Year

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Quite often, Elyse Andrews, the editor of Cabot Wealth Advisory, forwards your comments regarding what you like and what you don't like about the Cabot Wealth Advisory.

Your positive comments are encouraging and gratefully received. Many of you enjoy the commentary and find good use of the stock recommendations from our editors. Some of you are tired of ads begging you to subscribe to our investment letters. Unfortunately, the ads are necessary because we need your money to keep Cabot afloat. Full disclosure: I get paid by Cabot, and I need Cabot to keep sending a few dollars my way!

Your opinions seem to be mixed regarding the usefulness of our stock recommendations. I will be the first to admit that I have included a couple of clunkers ( Apollo Group ( APOL ) and ITT Educational ( ESI ) immediately come to mind), but I have been able to bring you many more winners than losers. My fellow editors have also written about stocks that have soared after their appearance in these columns.

Being a notorious "numberologist," I decided to prove beyond any doubt that the recommended stocks that you receive in my columns have performed admirably. My Cabot Wealth Advisory stocks have produced average gains of 41.4% from January 2009 through December 13, 2010. During the same period, the Standard & Poor's 500 Index has increased just 19.6%. The biggest winner for me has been Bucyrus International ( BUCY ) , which has traveled straight up since I recommended it in my January 2009 Cabot Wealth Advisory. I don't have the numbers, but I am sure that our other editors' picks have performed equally well.

Where do I find the extraordinary stock recommendations for this column? Most of the time, I select my stock picks using the teachings of Benjamin Graham, the father of value investing. My investment letter, Cabot Benjamin Graham Value Letter, launched in 2003, uses the teachings of Benjamin Graham. And just to finish my thoughts on performance, stocks recommended in the Classic Benjamin Graham Value Model during the past two years are up 104% compared to an advance of 32% for the Standard & Poor's 500 Index-I'm not bragging; well, maybe a little.

Unlike Cabot's growth publications, my Letter doesn't use market timing or stock charts, but instead relies on a 77-year-old system, also followed by investors such as billionaire Warren Buffett, to pick undervalued stocks and hold them until they become overvalued.

Value investing is about finding stocks the market has not correctly priced; in other words, stocks that are worth more than is reflected in their current price. Value investing has been proven to work well over time when you buy carefully, follow a proven system and hold for the long term. Most subscribers to Cabot Benjamin Graham Value Letter are looking for ways to safely build wealth over the long term. And they want the freedom to go on vacation without worrying about their stocks.

The main goal of the Cabot Benjamin Graham Value Letter is to provide exceptional stock recommendations using the techniques pioneered by Benjamin Graham. Our second goal, no less important, is to give you the confidence to buy those stocks and the patience to hold them until they rise in price and become overvalued.

If you can achieve those goals, I'm confident you'll get hooked on the value approach and look for value when making at least some of your investments.

Benjamin Graham wrote two books that formed the basis for his value investing system. I recommend both to anyone who is interested in learning more about value investing:

Benjamin Graham's classic book, Security Analysis , co-authored with David Dodd, laid the framework for the value investing system. Individuals and Wall Street professionals consider the timeless book, published in 1934, an investing bible. Security Analysis thoroughly explains Graham's value investing methods, including how to value stocks, how to establish the margin of safety, and how to follow the guidelines for successful investing.

Benjamin Graham also penned The Intelligent Investor in 1949, and the book has since been called "by far the best book on investing ever written," by Warren Buffet, one of Graham's students and followers. I use the criteria outlined in this book to select the stocks for the Classic Benjamin Graham Model Portfolio in my letter.


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Since the calendar is about to turn, my December column wouldn't be complete unless I reviewed 2010 and injected a few predictions for 2011.

2010 has been a very good year for value stocks. The stocks in the Standard & Poor's 500 Value Index are up 10.7% thus far in 2010 (through 12/13/10), and the Standard & Poor's 500 Growth Index is up 12.6% during the same period. Dividends, which are not included in the gains, were 37% higher for the stocks in the Value Index. And the Value Index had less volatility. Chances are, if you use a proven system, you probably made money in 2010.

2011 might prove to be a bit more difficult. There are a lot of crosswinds to contend with which could send the stock market in either direction at a moment's notice. One of the biggest bullish factors is: Stocks are going up. Despite the worries about sovereign debt, the Koreas, interest rates, the housing market, politics, etc., all the indexes have broken out to new two-year highs. The most bullish thing a market can do is go up.

In addition, consumer sentiment is improving, recent economic data is better, holiday shopping has improved, and the Fed is bound and determined to keep the economy moving forward. In addition, new tax cuts could put more cash in your pocket in 2011. Forecasters are calling for continued improvements in corporate earnings, and investors are talking about selling bonds and buying stocks.

The positive factors seem to outweigh the negative aspects, but we'll have to wait and see what unfolds.

My advice for 2011?

Stay the course and continue to use your system diligently. If you don't have an investment system, you should seek out a proven system used in one of the Cabot letters, or other sources-books, investment letters, but preferably not the advice promoted on TV. A final word of advice: Stay diversified because business sectors such as retail, health care, financial, and even technology could perform very well or not so well.

My favorite stocks to begin the new year? It is difficult to pick just a few stocks that might perform very well during the next 12 months. As I stated above, I prefer to be well diversified and invest in many stocks. But if I have to choose, I believe Arrow Electronics (ARW) and Prudential Financial (PRU) will rack up big gains for you in 2011. Both stocks easily qualify as Benjamin Graham undervalued stocks with low price-to-earnings and low price-to-book-value ratios.

Arrow Electronics, founded in 1935 and based in Melville, N.Y., is the second largest distributor of electronic components and computer products. The company is the distributor for 900 suppliers throughout North America (48% of sales), Europe and Asia. ARW offers wide-ranging customer technical support and service. Recent restructuring efforts have reduced costs and increased profitability.

Revenues increased 21% and EPS soared 113% during the 12 months ended 9/30/10. Stronger growth in Asia, astute acquisitions, and lower costs contributed to the exceptional sales and earnings results. Total sales will increase by a minimum of 10% and EPS will increase 25% during the next 12-month period. Growth could exceed our estimates if the economy picks up and acquisition costs diminish. We expect Arrow to purchase Nu Horizons Electronics before the end of 2010, which will add to EPS in 2011 and provide faster growth in Asia.

ARW shares are undervalued at 1.02 times book value and 9.7 times latest 12-month earnings per share (EPS). Strong demand in Asia coupled with ongoing acquisitions will enable ARW to expand more rapidly during the next two years or more. The company has not paid a dividend since 1986, but we believe dividends could be reinstated within the next couple of years. ARW's balance sheet is strong with plenty of cash to fund future expansion. ARW is medium risk. Arrow presents a rare opportunity to buy an underpriced value stock with rapidly growing earnings.

Prudential Financial, founded way back in 1875 with headquarters in Newark, N.J, is one of the largest financial services companies in the U.S. The company provides a wide range of insurance, investment management and other financial products and services. The Prudential name and "Rock" logo are among the most widely recognized in the U.S. and abroad. The company operates throughout most of the world, but is currently focusing on Japanese and Korean markets as well as retirement-oriented financial products in the U.S.

Revenues increased 11% and EPS soared 150% during the 12 months ended 9/30/10. Stronger growth in Japan and increased demand for annuities in the U.S. contributed to Prudential's outstanding sales and earnings results. Total sales will likely increase by 5% and EPS will increase 8% during the next 12-month period. Prudential will purchase Star Life and Edison Life from American International Group (AIG) during the first quarter of 2011. The acquisition will add significant revenues in 2011 and provide rapid earnings growth in 2012 derived from the rapidly growing insurance markets in Japan.

PRU shares are clearly undervalued at 0.76 times book value and 9.1 times latest 12-month earnings per share (EPS). Strong demand in Japan coupled with the two acquisitions will enable PRU to expand rapidly during the next several years. The recently increased dividend, paid annually, provides a yield of 2.0%. PRU is medium risk. The company's leading position, wide array of financial products and services, and global reach offer an investment opportunity too good to pass up.

I will continue to follow Arrow Electronics and Prudential Financial and other blue-chip, high-quality companies in my Cabot Benjamin Graham Value Letter. My next issue, coming soon, will focus on undervalued stocks with low price to earnings and low price to book value ratios. I hope you won't miss it!

Finally, I wish all you and your loved ones a happy holiday season and a healthy, prosperous New Year!

Sincerely,

J. Royden Ward
For Cabot Wealth Advisory

Editor's Note: You can find additional stocks selling at bargain prices in the Cabot Benjamin Graham Value Letter. In every issue, you'll find my legendary Maximum Buy and Minimum Sell Prices for over 250 stocks. Click here to get started today!



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: APOL , BUCY , DIS , DRP , ESI

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