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 (
ITT Educational (
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
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 (
, 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
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
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
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,
, 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
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
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
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!
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!