Last week, I wrote Buy And Hold: It's Alive! an article that makes the assumption - using my own personal stock picks from 2002 - that the traditional investment strategy of buying stocks for the long term actually works. Read on for what I feel are strong micro cap, small cap, mid cap and large cap picks going forward. (Read Buy And Hold Investing Vs. Market Timing to learn more about this investment style)
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Micro Cap - Zumiez (Nasdaq:ZUMZ)
Those of you who surf, skateboard or snowboard are probably familiar with the Seattle-based action sports retailer. It has 285 stores in 27 states across the country with room to grow once the economy fully recovers. Until then, it's likely to continue to see erosion in its same-store sales growth and overall profitability. In the April-June period, same-store sales decreased by an average of 18%. In late May, management projected a loss for its second quarter of 14-17 cents, double the 7 cents analysts were expecting. Farther out, Jim Duffy of Thomas Weisel Partners lowered his projections for all of 2010 to 7 cents from 20 cents, and in 2011 from 38 cents to 26 cents. Is it any wonder the stock has been trading under $10? Not in its current financial state. However, with the exception of the past year, it's never traded (IPO in 2005) below $10 and once hit above $50 in late 2007. At it's current price, I'm definitely a buyer. (Read Analyzing Retail Stocks to learn about the most important metrics for this sector.)
Small Cap - Tempur-Pedic (NYSE:TPX)
I must admit I'm biased on this stock. I wrote an article about it in March of 2008 in which I concluded that it was probably better to wait and see how much more the stock would drop before buying. My reasoning at the time was that it had already dropped 40% the previous year and its financials were deteriorating. It was a gradual decline, but the stock hit the $4 level in March and then proceeded to march upward to the $15.49 mark, where it sits today. What exactly caused its resurgence is anybody's guess. Actually, it's most likely a combination of an improving economy and beating analyst estimates by 24% in each of the last four quarters. Despite sales dropping 22% in Q2, it improved gross margins by 220 basis points due to higher pricing. This tells me all I need to know. It will return to growth in 2010, bringing higher profits for investors.
Mid Cap - Mohawk Industries (NYSE:MHK)
I'm a little nervous about picking Mohawk. It's not because I don't think it's got a future - it does. It's just that when I wrote glowing words about the floor coverings company back in March of last year, one of its biggest cheerleaders was Bruce Berkowitz, manager of the hugely successful Fairholme Fund. At the time, Berkowitz held 4.5% of the stock and was in love with its free cash flow. That was then. Today, Mohawk is struggling somewhat and he's moved on to other opportunities. That's OK. Money managers generally don't buy and hold anyway. I'm still excited by Mohawk for one reason: its free cash flow. In the second quarter it managed to generate more than $200 million, despite its operating income of 40% less than what it was in the same period a year earlier. It's doing the best it can given the conditions. Analysts appear split on its direction and that's usually a good thing. I love this business and I'm prepared to wait for better times.
Large Cap - Hess Corp. (NYSE:HES)
When I last wrote about the New York based oil and gas producer, refiner and marketer, its stock was trading at $96.06 and a barrel of oil sold for $108.75. Today, its stock is trading around $55 and a barrel of oil is going for $71. A 34.7% drop in the price of a barrel of oil resulted in a 42% drop in this company's stock price. At the time, Hess traded at less than one times sales while competitor Imperial Oil (AMEX:IMO) traded above two times. Hess now trades at 0.56 times sales and Imperial Oil 1.5 times sales. It seems some things don't change. If oil heads higher, I don't see why Hess can't revisit $96.
There are stocks of every shape and size that are poised to profit once the economy rebounds. These four stocks may not look outstanding right now, but they have great prospects for the long run.
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