The Market Week: Fairly Quiet for 'Buy' List, but About to Change

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 |  Includes: AFL, BBBY, JNJ, JOSB, ORCL, SYY
by: Eddy Elfenbein

The first quarter of 2011 is now officially on the books and it was a very good one for our Buy List. Once again, patient investing and sticking with high-quality stocks paid off.

For the first three months of the year, the S&P 500 gained 5.42% while our Buy List gained 7.62%. That’s an outperformance of 220 basis points which is pretty good for such a diversified portfolio. Including dividends, we gained 8.06% to the S&P 500′s 5.92%. Of course, I should mention that we accomplished this without making one single change to the Buy List all year, nor will we make any changes for the next nine months.

Our Buy List yields slightly less than the S&P 500, but it’s not a very big gap. Annualized, the S&P 500 out-yields us at about 1.9% to our 1.6%. If this matters to you, the beta of the Buy List was 1.035 for the first three months of the year. (Personally, I gave up on that mumbo-jumbo years ago.)

My goal for the Buy List is to beat the S&P 500 by a few percentage points each year and do it with slightly less risk. It’s an odd notion but an important lesson for investors: if you don’t try and swing for the fences, but rather just try to punch out singles, you can do much better. In fact, trying to go deep all the time actively hurts you.

Now let’s look at the long-term record: For the five-and-a-quarter years that I’ve been tracking our Buy List on the blog, we’re up 44.83% to the S&P 500′s 18.62%. That’s a hefty out-performance. (Our long-term beta is 0.943, again, to anyone who cares.)

To restate the rules of the Buy List, which have been the same rules since we started, the Buy List contains 20 stocks. We don’t make any changes during the trading year. At the end of each year, we add and delete just five stocks which keeps our turnover very low. It’s simple, but it works.

Now let’s turn to recent happenings on Wall Street. This past week was fairly quiet for the stock market and for our Buy List, but that will change soon. Earnings season kicks off in a few weeks and most of our stocks will report their earnings for the first quarter.

We did, however, get one very strong earnings report this week from Jos. A Bank Clothiers (JOSB). This report was a crucial one for the company since it covers the holiday shopping season. Usually, JOSB makes about half of their annual profit during December-January-February period.

For the quarter, Joey Banks said it made $1.47 per share which was four cents more than Wall Street’s consensus. In the CWS Market Review from three weeks ago, I said that Wall Street’s consensus was probably too low. I said I expected earnings of $1.50 per share or more. I was wrong on the $1.50 or more, but I was right that Wall Street was too low.

JOSB is a very impressive company. I’ll warn that the stock can be highly volatile, but the business results are impressive. For 2010, earnings-per-share jumped 20% to $3.08 compared with $2.56 in 2009. JOSB has no debt, and earnings have risen for the last 19 quarters in a row and for 37 of the last 38 quarters. That’s a very good record.

Three weeks ago, I urged investors not to chase JOSB but rather to wait for a pullback below $45 per share. As it turned out, the stock did indeed pull back to a low of $44.93 before resuming its climb. At Wednesday’s opening bell, the stock gapped up to a high of $52.50 before drifting lower. Since then, it’s mostly bounced around between $50 and $51.

In light of the strong earnings report, I’m going to raise my Buy Price to $50 per share. Once again, I suggest letting JOSB come to you. Please be disciplined here. Chasing stocks you want to own is a sucker’s game. It’s hard watching the good ones pull away from you, but sometimes you need to do it.

I think it’s interesting that Oracle (ORCL) followed a similar pattern to JOSB’s pattern. If you recall, Oracle posted very good earnings (as predicted by moi). As I expected, ORCL made a new 52-week high of $34.10. Since then, it’s pulled back and found a range roughly between $33 and $33.50. Last week, I raised my buy price to $34 which I think is a good place. Oracle is a very strong company and I wouldn’t be surprised to see it break out soon.

The next Buy List earnings report will most likely be from Bed Bath & Beyond (BBBY) and that’s due on April 6th. The company said to expect earnings to range between 91 cents and 95 cents per share. My take: That sounds about right, though maybe a little low.

What I’ll be most interested in hearing is if they give guidance for this year. If so, I’m looking for something between $3.30 and $3.40 per share. BBBY tends to give conservative guidance. I’m not ready to offer a specific buy price on BBBY until I hear more from them. Fundamentally, this is a very sound company and I expect the shares to do well.

I like all 20 stocks on the Buy List, but a few stand out as particular bargains. I like Johnson & Johnson (JNJ) below $60. Sysco (SYY) hasn’t performed well lately and I think it’s looking pretty cheap. It could be a $30 stock. You probably won’t be surprised to hear that I like AFLAC (AFL) at this reduced price. The company will report earnings on April 27th and we’ll see proof of how well this outfit is managed.