California Top 5 Stocks – 2014
Last year at this time I was very constructive on the market, and this year, somewhat the opposite. Stocks have run up enormously in the past five years or so, and, 2013 was another banner year. Most indices last year topped 20 percent on a total return basis and our own domestic market beat most global markets with the exception of Japan, which managed a 50 percent return. As a result, risks have increased and stock prices relative to earnings are now lofty. Indeed, the CAPE index (cyclically-adjusted price/earnings ratio) is now over 25, which is close to levels usually seen at stock-market peaks. No doubt, risks are high and I believe it makes sense to not only assume lower returns going forward, but to also protect against the downside. Holding conservative dividend-paying stocks makes sense to me as does sitting on a large pile of cash, ready to deploy, if prices become more attractive.
Last year’s California Top 5 (chosen from all publicly-traded companies based in California) produced stellar returns. The Top 5 was comprised of Charles Schwab, Chevron, Clorox, Intel and Wells Fargo. All five companies provided at least a 20 percent return with dividends included and the top performer by far was Charles Schwab, with a return of 80 percent. Believe me, I’m not patting myself on the back—it was a ridiculously easy year to make money and it actually took considerable effort to lose money in stocks. The weakest sectors of the market were gold mining shares and real estate investment trusts (to a lesser degree utilities), but pretty much every other sector of the market was up substantially. 2014 should be quite a bit more challenging and my Top 5 picks for 2014 are somewhat defensive in nature. I’m basically looking to NOT lose money this year in an overpriced stock market, if possible, while hopefully still earning single-digit percentage returns with dividends providing much of the total return.
For 2014, I am sticking with Chevron and Intel once again, but I have added three new selections for your interest. The following choices should be considered as candidates to add to an existing portfolio – not as a stand-alone portfolio:
Chevron (CVX): Recent Price $120, Dividend Yield 3.2 percent: The fourth largest oil company in the world has been a solid performer for many years. Its stock price has generally been on a steady upward trajectory during the past decade, but it moved sideways in the second half of 2013 while the broader market advanced. No, I don’t expect returns anywhere close to what we have seen during this bull-market run, as earnings doubled, but I do like the company as an attractive play on a still improving global economy. In addition, the growing dividend of $4.00 annually per share provides income investors with cash flow. Indeed, dividends have been hiked 9 percent annually in recent years which is terrific for investors. The company earns high marks for price stability and has a very healthy balance sheet with $21 billion in cash and manageable long-term debt. The risk here, as with all major oil companies, is a large decline in demand and the price of oil – this would not bode well for Chevron. Still, with a stellar balance sheet and a gradually improving global economy, this could be an attractive holding for moderate to conservative income investors. I would not look for outperformance from this stock, but it should hopefully keep pace with the overall market and provide plenty of income too.
Edison International (EIX): Recent Price $45, Dividend Yield 3.1 percent: Edison International is a holding company for Southern California Edison. It supplies electricity to nearly 5 million customers in California. Edison International has long been considered a fairly conservative holding, based on the nature of its business, but its stock price has taken investors on a wild ride over the past couple of decades. Once a $60 stock it is now priced around $45 and offers a market-beating 3 percent dividend. Still, within the utility sector it is not among the highest dividend payers although it has been raising its dividend at a consistent pace of a couple cents per share each year. It could certainly raise its dividend a lot more too, as dividends to net profit are only 45 percent—very low for a utility—so there is room to consistently grow the dividend in coming years. While I don’t see a lot of upside in this stock for 2014, and one could argue it could face some tough sledding if interest rates continue to rise (utility stocks often compete with bonds for investor dollars), I do see limited downside risk. With decent dividend growth prospects, a healthy balance sheet and the defensive nature of its business, this could be an attractive holding in a stock market that is richly priced.
Hewlett-Packard (HPQ): Recent Price $27, Dividend Yield 2.2 percent: Hewlett remains an intriguing turnaround story. The computing and imaging solutions company saw its stock price lose 80% of its value between 2010 and 2012. CEO Meg Whitman was hired to manufacture a recovery and help the firm return to its former glory. The company is making strides in the right direction and the stock price nearly doubled last year, but still sits more than 50 percent below its old highs. Earnings have rebounded nicely since the losses in 2012 and the dividend is growing again and poised to increase at a healthy clip assuming continued earnings growth. The company still, obviously, faces many challenges and the health of the overall economy and technology spending are critical to its survival. I would call HP the riskiest choice of this year’s Top 5, but that may already be factored into the share price which sits at the same level as it did in 1996. For patient investors willing to assume additional risk, Hewlett Packard’s turnaround may be the real deal.
Intel (INTC): Recent Price $25, Dividend Yield 3.5 percent: Intel is a leading manufacturer of integrated circuits with its primary market in personal computers (its chips can be found in approximately 80 percent of all personal computers). It has been a perennial underperformer, but its stock price perked up more than 25 percent last year. Remember, this is a stock that hit $75 in 2000 during the tech bubble and has never fully recovered. Having said that, it does offer a nice dividend yield and somewhat limited downside as it has been trading around current levels for much of the past ten years. Its dividend has been raised consistently over the years and the company now yields 3.5 percent (high for a technology company). I am cautiously optimistic about Intel in 2014 and view this holding as an attractive purchase near $25 without too much risk. It has an A++ balance sheet with $10 billion in cash and little long-term debt. Again, if the overall market struggles this year, I’m still hoping Intel will offer an attractive relative total return.
Occidental Petroleum (OXY): Recent Price $93, Dividend Yield 3.0 percent: Occidental produces and markets crude oil and natural gas. It has a long history of dividend increases and is attractive for dividend investors looking for a healthy growing dividend. Occidental gets good grades for its financial strength, but earnings have been volatile and are greatly determined by oil prices and economic activity. Regarding a possible entry point on the stock, it was trading over $115 in 2011 and currently rests around $93. Indeed, the stock has been in a somewhat sideways pattern the past couple of years, but that might be appealing given the high valuations of the overall market (and limited upside potential). So, continued sideways action in the stock, assuming dividend growth remains robust, may attract investors looking for moderate growth potential and good cash flow.
At the time of publication, Stuart Chaussee and/or his clients hold positions in Chevron and Intel, which are selections in the California Top 5 for 2014. Holdings can change at any time. Under no circumstances does the information in this column represent investment advice or a recommendation to buy or sell securities.
