My Top 10 List: An Update (Part 2)

Includes: HIG, MFCB, MWA, TEX, USG
by: Arne Alsin

<< Return to Part l

Steel yourself. As powerful as this bull market promises to be, it will most certainly not be a linear move higher. Consider it the cost of doing business: In order to generate outsized returns, you have to be able to stomach periodic, transitory pullbacks - even sharp sell-offs - as the market gradually works its way higher.

The average monthly gain in a bull market is 1.25%, give or take a tenth of a point or two. Don't get too excited when we spurt higher at a faster clip than that - as was the case in January - because it won't last. It can't last. And don't get discouraged when the market gets slapped around for a month or two or three. In the bigger scheme of things, it amounts to just so much noise.

The performance of my Top 10 List, posted exclusively on the pages of Seeking Alpha in December, should be viewed in the same vein. To be sure, I'm pleased that the list is off to a fast start, with all 10 picks outperforming, but it's too early to get excited. It's just a start. And while I thoroughly enjoy hearing from readers about how they made some serious green on picks like Whirlpool (NYSE:WHR) and Bank of America (NYSE:BAC) and Manitowoc (MTW, I also know that this game is just not that easy. As much as I strive to get better as an investor, to find and plug every last leak in my analytical process, mistakes are part of the game, and I will make them.

In Part 1 of this column, I updated you on my outlook for five of the stocks on the list: Whirlpool, Bank of America, Citigroup (NYSE:C), Manitowoc, and General Electric (NYSE:GE), Below, I'll review the five remaining stocks. Note that my opinion is colored by my view of the market, as I've articulated in prior columns, namely, that we're looking at a multi-fold wealth-building opportunity in the context of a multi-year bull market. As a result, my bias is heavily tilted to continued ownership of these companies, with an eye to accumulating additional shares on pullbacks.

Hartford Financial (NYSE:HIG)

If your preference is to invest only in the highest-quality businesses, this stock is not for you. Hartford is an asset play, pure and simple. And while I'm not particularly impressed by Hartford's various businesses - none of which stands out when compared with its peer group - it's a high probability bet that they are worth a lot more than the current quote suggests.

You don't need to build a spreadsheet to see it, either. They're trading at less than one-half of fully diluted net asset value, a net asset value that is very likely solid, given the risk-averse and risk-minimization mindset embraced by the management team at the company. To the extent you're looking for exposure to the financials, Hartford should make for a nice, profitable trade. One way or another, value is going to be unlocked here, whether or not hedge fund manager John Paulson is successful in his efforts to break up the company.

USG Corporation (NYSE:USG)

This premier, best-in-class franchise - the market leader in gypsum wallboard - is worth owning (at the right price) for multiple years. Very little has changed (except the stock price) from my original opinion: Earnings will normalize in the $2.20 area in a few years, suggesting a prospective quote in the $20s.

Of course, USG is heavily leveraged to housing, as is Mueller Water (NYSE:MWA), discussed below. While I don't pretend to bring unique insights to the table as to the timing of the recovery in real estate - other than it most certainly will recover, and probably earlier than the consensus expects - there is reason for optimism. Prices have dropped below replacement cost in many (if not most) areas. I'm lucky to live in the most beautiful city on the planet (San Diego), and prices here are so low (after a 60% decline from the peak) that I have to confess it's got my animal spirits stoked.

Just about anything you buy here can be rented out on an immediate and significant positive cash-flow basis with 15-year financing. In effect, someone else (i.e., the renter) will pay off your mortgage for you (over a 15-year period) while sending you extra cash each month for your trouble. And I've noticed an increasing level of competition on the offer side, with multiple bids. It was downright annoying to learn yesterday that there are five bids on the property I'm currently trying to buy. Haven't these people heard about this gigantic black cloud hanging over real estate called "shadow inventory"? I mean, all of the pundits agree that real estate isn't coming back for several years, right? And when all of the pundits agree on something, it just has to be true…doesn't it?

Mueller Water

Mueller has a suite of water infrastructure products that are #1 or #2 in their respective markets. While water infrastructure in the U.S. is way overdue for a major replacement cycle, there is no way to predict the timing. And given the leverage in this model to real estate construction - which is also impossible to predict with precision - all you can say about Mueller is that this will be a very valuable stock (multi-fold more valuable) at some point in the future. And that should be a source of comfort to investors, since they don't have to worry about the "if," just the "when."

Terex (NYSE:TEX) and MFC Industrial (MIL)

As I pen this piece, Terex is a few hours from reporting quarterly results. Whether it missed or exceeded targets won't change my opinion on the stock. My study of the Terex model suggests that it is only a matter of time (likely in two or three years) before Terex closes in on its 2007 record high earnings of $5.83 per share. My guess is that the earnings growth trajectory over the next couple of years will warrant at least a 12-15 multiple on those earnings, making this stock a potentially big winner.

Like Terex, MFC Industrial has not reported any new data, not that data in the short term will change my opinion on the company. MFC is looking to grow in its market niche - sourcing and delivery of commodities to clients all over the world - and I want to own this stock until I see how the company progresses in this effort. And, too, the company has a veritable boatload of cash, which gives me, as a shareholder, a healthy margin of safety.

By the way, if you're interested in MFC, I recommend you follow Clemens Scholl, a superb contributor to Seeking Alpha, who comments on MFC (formerly TTT) from time to time. The company is complex, and Clemens doesn't miss a detail.

Disclosure: I am long HIG, USG, TEX, MWA, MIL, GE, MTW, WHR, BAC, C.