When you buy a stock, you should read as much about the company as you can. That includes financial reports, market movements and possible analysts’ reports. Then, if you think it has good value, buy it. Peter Lynch, former head of Fidelity Magellan, said the best stocks to buy are companies located close to your neighborhood where you can check on them.
The Town Crier list of 50 neighborhood stocks is an excellent source for stocks with local executive leadership. While Wall Street has viewed the market rally with a suspicious eye most of this year, skepticism has been particularly high within the last few weeks since the May closing high of 13,279 on Dow Jones Industrial stocks.
With the Dow closing down last week, and Dow Industrials dropping well below their recent highs, we can take a look at several of the local neighborhood stocks. For U.S. investors, the primary challenge is generating decent inflation returns over the next 10 to 20 years, and that means dumping low-yielding bonds and moving into stocks.
• Google Inc. ($670.12; GOOG), one of our favorite neighborhood stocks, is continuing its torrid growth in the first half of 2012 with earnings per share rising 17 percent, sales increasing 30 percent and cash from operations up 19 percent. Despite that growth, the shares look cheap. Google has averaged a price-to-earnings ratio of 27 over the past five years.
Most recently, Google agreed to pay approximately $25 million for Frommer’s, the travel guide, which it expects will generate more travel advertising.
Morgan Stanley upgraded shares of Google from an equal-weight rating to an overweight rating. Morgan Stanley has a $775 price tag on the stock.
• Cisco Systems Inc. ($19.32; CSCO) is a local stock that is beginning to look favorable again. The per-share profits rose 18 percent to $0.47 in the July quarter. Sales rose 4 percent to $11.69 billion, ahead of the consensus estimate. For the fiscal year ending in July, operating per-share earnings rose 14 percent on a 7 percent sales gain.
The company now plans to return at least half of its annual free cash flow to investors through dividends and buybacks. The higher dividend equates to a current yield of more than 3.2 percent.
Zacks Investment Research commented that it thinks Cisco is a very strong company with significant market share and customer clout that would generate solid results as the economy continues to improve. Cisco has a buy rating for the near term but remains neutral in the long term.
• Intel Corp. ($24.90; INTC) is being dropped from several buy lists but remains a long-term buy because of weak operating momentum and earnings estimates. Intel’s per-share profits were flat or lower in the past two quarters, and the consensus projects another earnings decline in the September quarter. However, Intel seems capable of returning to profit in the December quarter.
Intel no longer qualifies as the top pick when compared with Apple, Google and Cisco. At less than 11 times trailing earnings, Intel trades at a 19 percent discount below its peer group. A pickup in momentum hinges on personal computer sales in the upcoming new version of Microsoft 8 to push Intel back into the buy list.
According to the Aug. 10 Kiplinger Letter, investors should fasten their seat belts for a bumpy ride from now to the end of the year.
Possible tax hikes on dividends and capital gains will produce market volatility. So don’t wait until December to sell if you want to unload stocks this year.
