Top Stocks to Buy in 2009 Part 3

Friday, May 8, 2009
By Faisal Laljee

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I realize this post is a couple of months late. Markets have rallied over 30% since March 9th, which was the lowest point in US equity markets in over 12 years. So I apologize to those that follow this blog for not getting this out sooner. Fact of the matter is that other priorities have taken over and it gets increasingly difficult for me to write meaningful and detailed posts each passing month. So I have turned as many have, to micro-blogging. You can follow me on Twitter where I occassionally spout off my thoughts on the market among other things. In any case, I will try to pick up the slack on this site.

In Part 1 and Part 2 of the series penned under this same title, I recommended buys on TIF, ANF, USO, POT, FXY and PCLN. Lets just see how we have fared so far.

PCLN is up 33% since Feb 8th when I recommended it, while TIF is up 26% and FXY is down 7%. Meanwhile, POT is up 46% since Jan 20th when I recommended it, while ANF is up 33% and USO is up 6%.

So what is next? Well despite the 30% run in the markets, there are still values out there. But some of these stocks have had huge runs so I would be careful. Doug Kass over at theStreet.com put it succintly as he tweeted “faster than superman, greed has now replaced fear”.

View the full SPY chart at Wikinvest

Meanwhile, for my third installment of Top Stocks to Buy in 2009, I recommend the following:


Apple

The stock has recovered a some of its losses over the last 2 months. If there was ever a roller-coaster with steep rises and falls, it has to be Apple (AAPL) for the last 18 months. In Dec 2007, Apple hit an all time high and missed closing above $200 by a whisker. It then retreated to $120 in less than 3 months and rose to $190 in the next 3. Since then though, the stock had run out of steam, until now.

On Feb 8th of this year, when I wrote Part 2 of this series, I closed out my post by saying Apple would probably feature in the third and final part of this series. Back then, the stock was under $100. Today it is 30% above that. But at $130, it is still 35% below its all-time high. However, the easy money has been made. The next leg up might not be as quick or easy. After all, since the Jan bottom, the stock is up 57%.

View the full AAPL chart at Wikinvest

For technicians, Apple’s 50 DMA is just about to cross the 200 DMA.

Apple has $25 billion in cash. It has over $5 billion in free cash flow annually. And in its most recent earnings, it reported higher margins. Without compromising the sale price of their products or their margins, they continue to sell luxury brand computing products in a tough economic climate. This is a testament to their brand and quality of their products. Consumers gobbled up over 11 million iPods just in their most recent quarter, along with 2.22 million Mac computers, and 3.79 million iPhones.

The Apple App Store has over 25,000 applications now with over a billion applications downloaded in less than a year since launching the App Store.

These are no small numbers. While some might consider Apple’s valuation a little lofty given the recent run in the stock, I think that a multiple of less than 17 times next year’s earnings (adjusted for cash) is a pretty decent one. I would buy AAPL on down days.

Google

The other stock that I talk about most often on this blog is Google (GOOG). In a previous post about Growth in Digital Marketing and How to Benefit from it, I talked about the shift in advertising dollars to the internet space.

According to eMarketer, in a recent study conducted by Society of Digital Agencies, 81% of respondents said they plan to invest at least as much in digital marketing in 2009 as in the previous year. More than 77% of traditional advertising agencies are increasing the amount of digital in their budgets by 1% to 29%. And over 10% are upping online budgets by 30% or more. When asked if they were doing more digital work in the wake of the downturn, at least 36% of advertising professionals of all stripes said yes, and many expect to take on significantly more.

In Nov 2007, Google stood tall at $740 per share. A year later, it was struggling to hold $260. But following a couple of strong quarters, Google has rallied 54% since Nov 2008. Given the state of the economy and the cut in advertiser spending, Google has done well to have earned GAAP EPS of $4.49 in Q1 of 2009.

View the full GOOG chart at Wikinvest

Now lets consider their product line. GMail keeps on adding new customers. In fact, it has now overtaken Hotmail in terms of monthly unique visitors.

Google’s Android OS is the hottest ever OS for mobile devices. In fact, over 20 Android devices are slated to launch this year alone and being that mobile devices are the fastest growth vehicle for advertising dollars, this bodes really well for Google.

Finally, Google’s core search business continues to gain market share against rivals Yahoo and Microsoft. Based on growth estimates from studies such as the one from SDA above and others from eMarketer, Kelsey Group and Ad Age, all signs point to significant growth in digital advertising and market, primarily due to its measurable impact to a business. This is where Google is the champion and remains unchallenged. When the economy recovers, more ad dollars will have left for the online space, away from radio and print.

Google, much like Apple, has no debt and plenty of cash ($18 billion to be precise) and trades at less than 15 times next years earnings. In my book, this is still a growth stock considering how young this industry is.

S&P Financial Index

The S&P Financial index represented by XLF has been the most hated stock (ETF) over the past 24 months. It consists of all the dreaded financial plays including Bank of America, Goldman Sachs, Morgan Stanley, US Bank, Wells Fargo etc. The stock and the sector have been the hardest hit and the XLF found itself going from a high of $38 back in June 2007 to $6.25 earlier this year, a decline of over 83%.

View the full XLF chart at Wikinvest

Since then, the XLF has rebounded. It has doubled to almost $13 today. Now as I mentioned earlier that I have been very slow to blog some of these ideas. I got turned on to XLF a month ago and all I could do was tweet about it.

At the next pull back, I recommend buying XLF. The American financial system, while weak, is by no means about to fall off the face of the earth. In 2010, the US will emerge from this financial crisis and the economy should start to expand. By then, it would have been too late to buy XLF or any of the stocks mentioned above. Remember that the stock market always tracks a few months ahead of news. So if you believe 2010 will be a turn around year for the economy and employment, buy stocks now.

This concludes my three-part series of Stocks for 2009. At the end of this year, I will track the performance of these three against the broader market so we will know how right or wrong I was.

– Faisal Laljee

Full Disclosure: I own XLF and Apple but my position can change anytime without notice.

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Related Stories:

Top Stocks to Buy in 2009 Part 2
Top Stocks to Buy in 2009 Part 1

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