By Neal Goodwin, Guest Editor
Today, we took another look at a few of Jeremy Grantham's latest buy ideas. For those wondering why one should follow the advice of Jeremy Grantham, look no further than the continuous success of his Boston-based asset management firm Grantham May Van Otterloo (GMO). GMO has had a 10 year cumulative return of 31% versus just 16.4% in the S&P (NYSEARCA:SPY). In a recent article with businessinsider.com Jeremy predicted that stocks are subject to a boost, in part due to the the Presidential Cycle we find ourselves in at this time. Year 3 of the Presidential Cycle has historically been very good for stocks because the current government does everything it can to help itself get re-elected, including flooding the economy with cheap money, in turn raising the value of stocks. So, with this in mind, what has Jeremy been buying for his investors? Here is a list of 10 of his newest buy ideas. Use this list as a starting point for your own due diligence.
NextEra Energy, Inc. (NYSE:NEE): From the 10K, NEE engages in the generation, transmission, distribution and sale of electric energy in the United States and Canada, and as of the turn of the new year had approximately 43,000 mega watts of generating capacity. The company generates renewable energy from wind and solar projects, and generates electricity through natural gas, nuclear, oil, coal and hydro power plants. The most enticing single statistic is NEE's yield of 3.80%. It last traded at $58.60 and has a dividend of $2.20 with a relatively low P/E of 14.58, suggesting this stock is currently being undervalued. Recently, NEE has had some issues with power outages in some of the nuclear reactors, however this has left its stock essentially unaffected because NEE has a solid history of being able to turn in an increased income from the previous year, even with fluctuating sales numbers (since 2004 NEE has had sales anywhere from $16 billion  to $10 billion , but has been able to increase net income every year, save a slight drop from 2008 to 2009, and topping at $1.957 billion in 2010). NEE has also successfully increased the dividend since 2001, from $0.56 to $2.2 currently. I personally like the prospects of this stock. If investing in this stock, keep a close eye out for the happenings with the shut down reactors, however the number of shut down nuclear reactors is only slightly above the average number it usually has shut down for this time of year, and is a problem that I assume will be corrected quickly. NEE has a good track record, increasing both dividends and earnings per share for 10 straight years now.
Dr. Pepper Snapple Group (NYSE:DPS): DPS, you might have heard of it, operates as a brand owner, manufacturer, and distributer of non-alcoholic beverages in the US, Canada, Mexico and the Caribbean with a diverse portfolio of flavored carbonated and non-carbonated beverages. Currently trading at $42.09, and providing dividends of $1.00 per share gives DPS a healthy yield of 2.40%. Also, with a P/E 17.96, this company is very healthy in the peripheral statistics, and may even have some room for improvement with a market cap of $9.32 Billion. Although some investors are skeptical across the board, I am very high on this stock. For one, the company is n the process of introducing a new 10-calorie Dr Pepper, which is proven to have more success among male buys than similar zero calorie drinks. Second, DPS just signed a long term contract with the Houston Dynamo, which is not the New York Yankees but is a boost to company value. Third, DPS has very little presence in developing countries compared with Coca-Cola (NYSE:KO) and Pepsi (NYSE:PEP), but is expanding its international influence and sales volume and the opportunity to penetrate developing nations presents a great growth opportunity, and should fuel a significant potential increase in stock value. I'm giving DPS a solid buy rating.
Valeant Pharmaceuticals International (NYSE:VRX): In the healthcare sector drug delivery industry, an understanding of VRX includes that it is a specialty pharmaceutical company that develops, manufactures and markets pharmaceutical products in the areas of neurology, dermatology and branded generics. Its total product portfolio comprises approximately 490 products. VRX is currently in discussions with Salix Pharmaceuticals (NASDAQ:SLXP) about a possible transaction (VRX purchasing SLXP), and it is in discussions with "multiple transaction candidates." SLXP has been successful as of late, and even more importantly has a solid presence in "the Triangle" with medicines approved for patients' use, something which VRX only has a small presence in. VRX is currently trading at $49.65 and provides dividends of $0.38, good for a 0.80% yield. VRX does not have a P/E value. While VRX currently has a negative EPS of -0.85, my view on this stock lies largely on the potential acquisition of SLXP or a company of similar standing. VRX clearly has some extra cash, as shown by its aggressive public acquisition attempts, but I would feel much better about the stock if the company were able to complete a transaction for another major asset. I will give this stock a hold rating for now, and upon the completion of an acquisition I would upgrade to a solid buy.
Rayonier, Inc (NYSE:RYN): From its 10K, RYN engages in the sale and development of real estate and timberland management, as well as in the production and sale of cellulose fibers in the United States, New Zealand and Australia, operating in four segments: Timber, Real Estate, Performance Fibers, and Wood Products. RYNs last trade came in at $65.97 and it has a P/E of $24.70. RYN has a solid yield of 3.30%, providing a dividend of $2.16. With a beta of 1.19, RYN traditionally flows with the market, which bodes well for the stock in the upcoming months due to year 3 of the Presidential Cycle. RYN is in a good spot right now given that 45% of its earnings are in exports, and the current low level of the US dollar is driving net exports up. Additionally, Japan's lumber-related imports are supposed to increase to the highest level since 2008, and RYN is listed as one of the companies likely to benefit from this increased demand for wood raw material. Since the financial problems of 2008 caused stocks as a whole to dip, RYN has been steadily increasing in value, and has seen its greatest increase in the past year, jumping 45.4% since this time last year. RYN is also one of the largest holders in the global timber and forestry industry, an industry that has been doing extremely well recently. I like the prospects going forward of this individual stock, am reassured by the likely increased business soon to come from Japan, and given its history it appears a very safe investment. Rating: solid buy.
Tenneco, Inc (NYSE:TEN): From the 10K, Tenneco designs, manufactures and sells automotive emission control and ride control systems and products worldwide. TEN has an outsized beta of 3.68, a volatility that can reap some serious rewards or lay some serious hurt on your portfolio. In the past year, TEN has increased its stock price by 79%, but over the last 3 months it has dipped 8.5%. That’s what you get with a crazy beta of 3.68. TEN is currently trading at $39.97 and provides no dividends. P/E is 31.30, suggesting this stock may be slightly overvalued. Looking over the latest quarterly report, Tenneco has more than doubled profits in Q1 of 2011, from Q1 2010, increasing from $15 million to $39 million. TEN may be poised for a fall back down to earth, or it may continue its meteoric rise; it is always difficult to say with stocks containing a beta this high accompanied by very little public information and news on the company. My gut tells me to approach with caution given the high beta and slightly above healthy P/E. One thing's for sure, surround this stock with diversity if you do choose to buy.
Under Armour (NYSE:UA): From its 10K, UA develops, markets, and distributes performance apparel, footwear, and accessories for men, women, and youth in the United States, Canada and internationally. The company also specializes in "protecting this house." While a great name in company, this may not be such a good name in stocks. Over the last year, UA has increased just a hair below double its value, 95%. UA is trading at a $64.09 mark and is providing no dividends. On top of that, a P/E of 44.94 suggests UA may be overvalued and prone for a drop in value unless the company is able to expand its market. UA is centered in the upper end of sports apparel markets, and in order to expand it will likely have to stretch its niche, which it has not been doing. Also, UA has an EPS of 1.43. While positive numbers are always good, seeing an earning of 1.43 on a $64 share is not moving any mountains. Combine this with a slightly high beta of 1.66 and this stock seems a little risky for me. I would not advise against holding the stock for current owners, but I do not believe it is worth the buy.
Diamond Offshore Drilling, Inc (NYSE:DO): DO operates as an offshore oil and gas drilling contractor worldwide. From its 10K, the company provides offshore drilling services in the deepwater, harsh environment, conventional semisubmersible, and jack-up markets to independent oil and gas companies and government-owned oil companies. Just last week (5/12) DO killed two birds with one stone in signing two drilling contracts with Anadarko Petroleum Corp (NYSE:APC). The contract is going to bring in an estimated $1.8 billion in revenue, and the two companies have also agreed to drop all claims from an instance in which APC tried to get out of a previous contract for drilling in the Gulf Shores once a six-month ban was implemented on the area following the oil spill. APC apparently had the upper hand in any legal dispute due to the happenings of a "natural disaster or some other extraordinary event," so this is great news for DO. The stock is currently trading at $70.65, providing a dividend and yield of 0.50 and 0.70% respectively, and has a low P/E of 10.74. The posted 1 year estimated target is only 75.79, but I expect that to go up following the news of the latest contract. Other good news for OD is that the drilling ban in the gulf is lifted. I love the peripherals of DO, but performance over the last five years leaves you wanting more as it has had numerous peaks and troughs. I think this is a solid buy in the short term considering the beneficial news surrounding the company, but keep an eye on it.
General Growth Properties (NYSE:GGP): From its 10K, GGP operates as a real estate investment trust in the US, operating in two segments: Retail and Other, and Master Planned Communities. GGP has a beta of 4.02. A beta as high as the clouds is not enough by itself to fully evaluate a stock, so let's take a look at some more peripherals. GGP is selling at $16.05 per share, does not provide a P/E, and gives dividends of $0.40, which is a solid yield of 2.50%. However, although the company had a good dividends record until mid-2008, payments have been spotty since then. On top of that, its listed earnings per share is -2.62. This stock has been far too volatile, on top of the fact that the company is not consistent with dividends payments, and does not have a good PEG ratio (2.7). I would stay away from this stock as it appears risky.
Silver Wheaton Corp (NYSE:SLW): SLW operates as a silver streaming company worldwide. From its 10K, Silver Wheaton has 14 long-term silver purchase agreements and 2 long-term precious metal purchase agreements whereby it acquires silver and gold production from counterparties across the world. The company operates largely by purchasing cheap silver produced as a by-product of gold mining, and then selling the silver at market value, making for a profitable exchange. SLW is currently trading at $34.32 and is providing dividends of $0.12, a yield of 0.40%. A P/E of 32.94 is slightly high, however a forward looking P/E of 15.12 means the company is poised for expansion and is likely to decrease that number, allowing for larger potential stock increases. SLW has a 200-day moving average of 37.55 and a 50-day moving average of 40.66, suggesting that the stock is simply in a small rut now due to negative fluctuations that should correct in the near future. When that does, you are going to want to own this stock. I put a strong buy on SLW as the company has a sound method of business, strong peripherals, and happen to be in the trough of a normally profitable sector that should soon correct itself. Buy with confidence.
Aon Corporation (NYSE:AON): From its 10K, AON provides risk and insurance brokerage services and consulting services worldwide. There is no notable recent news on AON, just a consistent increase in stock prices for the past 10 months that has allowed a 25% increase over the last 12 months. Selling at $52.37, giving dividends on $0.60 for a yield of 1.10% and supporting a P/E of 21.19, there is nothing sexy about AON, but it continues to deliver consistent results in the stock market. A beta of 0.49 suggests stability and low risk, a profit margin of over 8% shows financial stability, and both return on assets and return on equity are seeing solid results (3.33% and 11.85%, respectively), showing management is doing its job. Currently, AON is sitting right below its 50-day moving average (52.74). I give this stock a buy rating.