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20 Stocks for the Second Half

All About Quality

And now, one more viewpoint before continuing. Larry Williams, veteran of 40 years of trading and author of the excellent new book The Right Stock at the Right Time: Prospering in the Coming Good Years , called the recent market rally on the button in October, so he has earned the right to call the top. And he said in an interview last week from his home in San Diego that he pulled all his money out of stocks in the third week of June when his market valuation and sentiment models had risen to historically high levels. "I'm not wildly bearish here, but I'm not bullish either," he said. "I think we're going to go down to sideways. No one was bullish last fall when we bought in, and now we're on the opposite side of the spectrum."

Williams says he doesn't short-sell stocks when he turns bearish, as he finds it too risky for his blood. He also doesn't buy speculative stocks when he believes the trend is positive, as he prefers shares of high-quality companies that put in steady results. "It's about missing the losers, not berating yourself for missing some big winners," he said. "If you can just avoid the three to five worst stocks in the Dow Jones Industrials, you can beat that index without any problem."

At this juncture, it seems the consensus view holds that stocks have seen their bear-market lows and are now on the mend in a slowly strengthening economy shot full of adrenaline by tax cuts, lower interest rates and quiescent energy prices. The consensus believes that high-beta technology and retail stocks are in favor, lifted by expectations of higher profits in the fourth quarter -- along with explosive spending from Americans armed with refi money and tax rebates.

Leaning somewhat against the wind, then, I'll suggest that investors are better off today with high-quality, dividend-paying defensive issues again, just as they were in 2000 and 2001, and should be wary of many of the speculative groups and names that shot up in the second quarter. My 10 broad-market picks for the second half, chosen with assistance from the MSN StockScouter rating system, are listed in the following table. My top five picks for the Dow alone are listed in the second table.

StockScouter top 15 for the second half
Company Name June 30 Price % Chg YTD Rating
Burlington Resources (BR) 54.07 26.3 10
Colonial BancGroup (CNB) 13.87 16.3 10
Cisco Systems (CSCO) 16.79 28.9 10
Cognizant Technology Solutions (CTSH) 27.30 13.4 10
Doral Financial (DRL) 46.69 64.54 10
Electronic Arts (ERTS) 80.99 62.7 10
Entergy (ETR) 53.21 18.4 10
Flagstar Bancorp (FBC) 25.55 138.4 10
First Financial Holdings (FFCH) 29.91 22.5 10
Fifth Third Bancorp (FITB) 58.71 1.2 10
FirstMerit (FMER) 23.63 11.5 10
Greater Bay Bancorp (GBBK) 20.43 19.8 10
Granite Construction (GVA) 20.07 30.9 10
Great Plains Energy (GXP) 29.28 32.1 10
Getty Images (GYI) 41.61 36.2 10

StockScouter top 5 Dow stocks for the second half
Company July 7 Price % Change YTD Rating
Home Depot (HD) 33.77 41.6 10
Citigroup (C) 44.94 29.3 10
Caterpillar (CAT) 56.41 25.7 9
Intel (INTC) 22.91 47.5 8
Coca-Cola (KO) 44.95 6.1 8

Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at supermodels@jonmark.com. At the time of publication, his fund was neither long nor short any stock mentioned in this column, but positions can change at any time. TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.
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