Since the calendar is about to turn, my December column wouldn’t be complete unless I reviewed 2010 and injected a few predictions for 2011.
2010 has been a very good year for value stocks. The stocks in the Standard & Poor’s 500 Value Index are up 10.7% thus far in 2010 (through 12/13/10), and the Standard & Poor’s 500 Growth Index is up 12.6% during the same period. Dividends, which are not included in the gains, were 37% higher for the stocks in the Value Index. And the Value Index had less volatility. Chances are, if you use a proven system, you probably made money in 2010.
2011 might prove to be a bit more difficult. There are a lot of crosswinds to contend with which could send the stock market in either direction at a moment’s notice. One of the biggest bullish factors is: Stocks are going up. Despite the worries about sovereign debt, the Koreas, interest rates, the housing market, politics, etc., all the indexes have broken out to new two-year highs. The most bullish thing a market can do is go up.
In addition, consumer sentiment is improving, recent economic data is better, holiday shopping has improved, and the Fed is bound and determined to keep the economy moving forward. In addition, new tax cuts could put more cash in your pocket in 2011. Forecasters are calling for continued improvements in corporate earnings, and investors are talking about selling bonds and buying stocks.
The positive factors seem to outweigh the negative aspects, but we’ll have to wait and see what unfolds.
My advice for 2011?
Stay the course and continue to use your system diligently. If you don’t have an investment system, you should seek out a proven system, but preferably not the advice promoted on TV. A final word of advice: Stay diversified because business sectors such as retail, health care, financial and even technology could perform very well or not so well.
My favorite stocks to begin the new year? It is difficult to pick just a few stocks that might perform very well during the next 12 months. As I stated above, I prefer to be well diversified and invest in many stocks. But if I have to choose, I believe Arrow Electronics (ARW) and Prudential Financial (PRU) will rack up big gains for you in 2011. Both stocks easily qualify as Benjamin Graham undervalued stocks with low price-to-earnings and low price-to-book-value ratios.
Arrow Electronics, founded in 1935 and based in Melville, N.Y., is the second largest distributor of electronic components and computer products. The company is the distributor for 900 suppliers throughout North America (48% of sales), Europe and Asia. ARW offers wide-ranging customer technical support and service. Recent restructuring efforts have reduced costs and increased profitability.
Revenues increased 21% and EPS soared 113% during the 12 months ended 9/30/10. Stronger growth in Asia, astute acquisitions, and lower costs contributed to the exceptional sales and earnings results. Total sales will increase by a minimum of 10% and EPS will increase 25% during the next 12-month period. Growth could exceed our estimates if the economy picks up and acquisition costs diminish. We expect Arrow to purchase Nu Horizons Electronics before the end of 2010, which will add to EPS in 2011 and provide faster growth in Asia.
ARW shares are undervalued at 1.02 times book value and 9.7 times latest 12-month earnings per share (EPS). Strong demand in Asia coupled with ongoing acquisitions will enable ARW to expand more rapidly during the next two years or more. The company has not paid a dividend since 1986, but we believe dividends could be reinstated within the next couple of years. ARW’s balance sheet is strong with plenty of cash to fund future expansion. ARW is medium risk. Arrow presents a rare opportunity to buy an underpriced value stock with rapidly growing earnings.
Prudential Financial, founded way back in 1875 with headquarters in Newark, N.J, is one of the largest financial services companies in the U.S. The company provides a wide range of insurance, investment management and other financial products and services. The Prudential name and “Rock” logo are among the most widely recognized in the U.S. and abroad. The company operates throughout most of the world, but is currently focusing on Japanese and Korean markets as well as retirement-oriented financial products in the U.S.
Revenues increased 11% and EPS soared 150% during the 12 months ended 9/30/10. Stronger growth in Japan and increased demand for annuities in the U.S. contributed to Prudential’s outstanding sales and earnings results. Total sales will likely increase by 5% and EPS will increase 8% during the next 12-month period. Prudential will purchase Star Life and Edison Life from American International Group (AIG) during the first quarter of 2011. The acquisition will add significant revenues in 2011 and provide rapid earnings growth in 2012 derived from the rapidly growing insurance markets in Japan.
PRU shares are clearly undervalued at 0.76 times book value and 9.1 times latest 12-month EPS. Strong demand in Japan coupled with the two acquisitions will enable PRU to expand rapidly during the next several years. The recently increased dividend, paid annually, provides a yield of 2.0%. PRU is medium risk. The company’s leading position, wide array of financial products and services, and global reach offer an investment opportunity too good to pass up.
A lifelong investment professional, J. Royden Ward applies his 40 years of investment research, portfolio management, writing and publishing experience to his role as analyst and editor of Cabot Benjamin Graham Value Letter (http://www.cabot.net/). The Cabot Benjamin Graham Value Letter is... More 
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