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The powerful post-election rally has taken a lot of investors by surprise, emotionally and financially. One minute you're in a groove, thinking all of your decisions about your cash, equity and real estate asset allocations are smart. The next minute, you wonder if you're an idiot for not having more money in stocks.
That's why it's ironic that the sharp upward spikes in the market after long periods of decline or consolidation are referred to as relief rallies. The fact is that most investors view them more with suspicion and confusion than relief due to the painful quality of the preceding period.
Yet the urge to deploy some cash now that the market has gotten up off the mat is strong. And it might actually make sense to give in to it this time. All of the major indices have tenaciously battled the bears and won, finally moving to small single-digit gains for the year. Oil prices are down, inflation is stable, retailers are reporting decent seasonal sales, and the economy is healthy enough for the
to raise interest rates.
Moreover, Paul Desmond at Lowry's Reports, a research service that does a good job of gauging the supply and demand for stocks for large financial institutions, told clients on Friday that conditions look right for at least another four to six months of advance.
Desmond said his key measure of equity-buying pressure had moved to a recovery high, while selling pressure had moved to a new multiyear low. He also noted that his unweighted market breadth index had also risen to an all-time high, suggesting that buyers are interested in all kinds of stocks, not a narrow list of stars. And his ratio of new highs vs. new lows has also risen to a level indicative of enduring strength, not a mere spike.
Shades of 2003
If this is a decent time to invest cash, it is reminiscent of the scenario a year ago. Then, too, many investors wondered whether it was smart to invest after having missed a chance to deploy cash at the absolute bear market bottom of October 2002 and March 2003.
With angst running deep, I published a column in September 2003 titled "
No, It's Not Too Late to Buy Stocks". I suggested that readers consider taking a stake in 30 successful companies then trading near their five-year highs that had proved their consistent inevitability over the prior five years of boom, bust and boom echo.
That list is now up 34% as a group, vs. a 16.6% gain for the
. It's interesting to note that 28 of the 30 stocks are up 10% or more, with just two down.
With trepidation at the prospect of ruining my winning streak, this seemed like a good time to create a new Reliability 30 as an antidote to the current stress level. My criteria will be the same, just shifted a year later. I looked for 30 stocks that:
- Are within 5% of their five-year highs.
- Have StockScouter ratings of 8 or better (preferably 9 or 10).
- Had advanced in at least five of the past six years.
- Did not decline more than 10.9% in their single negative year.
Also, they must have market capitalizations of at least $100 million and past-year earnings and revenue gains of at least 10%.
These criteria ensure that we're looking at companies that are not just successful as businesses. They are also able to re-create that success year after year, no matter what the broad market or economy is doing. The criteria are agnostic about sectors, market capitalization or the vectors of growth and value.
Here are the 30 names:
Before studying the specific situations of a few of these companies, you might well wonder why there are only three of last year's names on the list: dental instruments distributor
and real estate investment trust
Pan Pacific Retail Properties
( PNP). The answer is that while all but the two losers are still reliable, they have lost a notch or two in the StockScouter rating system as newcomers have moved up.
More Banks, No Techs
The new list has fewer real estate investment trusts but more small regional banks. Like last year, it has no technology companies -- largely because the techs were hit so hard in 2000-02.
There are a couple of retailers in
Bed Bath & Beyond
; a couple of truckers in
Alexander & Baldwin
; a truckmaker in
; and several compelling sideshows such as gum-maker
( WWY), industrial-equipment maker
and regional brokerage
Several of the financial institutions on my list have histories and profiles that are particularly eye-catching.
- UCBH Holdings( UCBH) has been up for six consecutive years by a minimum of 22% and a maximum of 127%. The $2 billion market-cap bank focuses on commercial lending to small and medium-sized businesses of the Chinese immigrant communities of San Francisco, Los Angeles and Sacramento. At the end of last month, the stock emerged from an 11-month base with a swift advance from $39 to $47. Earnings and revenue growth have regularly grown 18% to 22% per year, but its price-to-earnings multiple is relatively tame for a premium company at 22 times estimated 2005 earnings.
- Cathay General Bancorp (CATY) - Get Report has risen for 11 straight years, including 49% this year, for a compounded annual return of 26%. It services the same type of customers as UCBH out of its base in Los Angeles; its growth rate is a touch lower, but so is its P/E -- at 19 times 2005 earnings.
- Jefferies, which focuses on investment banking and services for small-cap and mid-cap companies, has risen in nine of the past 10 years, with the only shortfall being a decline of less than 1% in 2002. CEO Richard Handler bought $6.5 million worth of the company's shares on the open market over the past 10 months at $30 to $38. The current price, at $41, isn't too far above his highest price, as the stock has just recently recovered from an $8 decline in midyear.
- Brascan( BNN), which is a very unusual conglomerate, is the only Reliable 30 holding in the utility business. The Canadian company has posted gains in the past six straight years, including an 80% pop in 2004, with interests in 55 office properties and 120 power plants as well as a fund management business. Its object of generating high returns on equity via "consistent and sustainable" cash flows appears to be working.
I wouldn't hesitate to put any of these stocks in a real portfolio this week, despite their elevated levels. All of them have shown respect for their shareholders with deeds, not just press releases. I'll follow them over the next 12 months and report back from time to time.
Jon D. Markman is publisher of
StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. At the time of publication, Markman was long Florida Rock and Bed Bath & Beyond. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at
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