Wednesday, January 10, 2007

Should you be a fool?

The Motley Fool, in an article entitled Companies you should buy right now is recommending the following stocks as buy and hold candidates. I have some difference of opinion, but here's a key quote from the article:

What makes a great company? That's the rub. There can be a lot of ways to measure greatness. eBay (Nasdaq: EBAY) and Southwest Airlines (NYSE: LUV), for example, have high net promoter scores. Coca-Cola and Nike (NYSE: NKE) have nearly unmatched brand and marketing savvy. Boeing (NYSE: BA) and 3M have long histories of innovation. Starbucks (Nasdaq: SBUX) and Genentech (NYSE: DNA) have strong corporate cultures and are among Fortune's 100 Best Companies to Work For.

The article was originally published Dec. 8, 2006 and has been updated for publication on Jan. 9, 2007. (Makes one wonder which ones were switched out)

Right off the bat, I have some concerns over anyone calling eBay a great company. As I explained in my stock of the day feature, the company has been mismanaged and made poor business decisions for years.

Southwest Airlines? The stock has ranged between 12 and 22 for 5 years and is currently in a holding pattern over 15. Perhaps the "Fools" expect us to hold stocks that fly under the radar of the S&P 500. Maybe we'll just walk away.

Besides being suspected of operating in many countries as a CIA front, Coca-Cola still has that brand appeal, but the world of soft drinks is evolving quickly, toward more eco-friendly and trendy offerings. Coke has hung in gallantly and is a leader, but where is the growth and price appreciation going to come from? I don't see it.

Nike? See above, though the stock has been a stellar performer. Since late 2002, share price has appreciated from 40 to 100. Even I can't knock a 150% return over 4 years.

Another star performer is Boeing, which has run from the high 20s in early 2003 to near 90. Those monster returns are not likely to recur. recommending stocks near their highs may be foolhardy, but hardly prudent.

What can I say about 3M besides that it's so old school. The stock hasn't budged since late 2003, so maybe it's time for a move. Like others here, it does pay a dividend. Are the Motley Fools suggesting that 2-3% returns are de rigeur?

I like Starbucks coffee and the company has a great culture, but American's appetite for $4 lattes may wane and competition is sure to take a bite. Starbucks also sports a p/e over 40, so it's no bargain. Shares have ridden up from 10 to 40 over the past 5 years, and that kind of performance (400%) is going to be hard to top. If there's a winner on this list, this may be it.

Probably the most recognizable name in biotech, Genentech is a leader in profit as well. The company is expected to return 2.68 per share in 2007. However, the price of the stock doubled in mid-2003, split in 2004, ran up to nearly 100 in 2005 and was flat in 2006. This is a well-entrenched company, but maybe a touch pricey with a p/e close to 50. Value may still matter to some.

Overall, what impressed me about these picks was how many were close to their highs after impressive runs over a long bull markets. The Fools might have better served their readers - in an article professing that investors trade too often - by advising to time their buys on these stocks or wait for a general market correction before taking a plunge. They didn't.

I'll keep an eye on these stocks and check back in 6 months, a year, and beyond. Obviously, I don't care much for these picks and will stake my reputation against the Motley Fools, a bunch with whom I've frequently found fault.

Here are the closing prices from January 9 on the Fool's picks:
eBay: EBAY 29.75
Southwest Airlines: LUV 15.81
Coca-Cola: KO 48.61
Nike: NKE 99.76
Boeing: BA 88.00
3M: MMM 77.68
Starbucks: SBUX 34.86
Genentech: DNA 84.69

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