John Dorfman—These Stocks Could Show Gains Even If Market Dips

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It’s the time of year when otherwise sane men and women succumb to the prediction virus.

In that spirit, here are my 10 favorite stocks for the new year. My hope is they will provide gains even if the stock market as a whole moves little to lower, as I think it will.

My guess is that we will have a strong January, but earnings disappointments will put a damper on the balance of the year, and as a result I expect the Dow Jones Industrial Average and the Standard & Poor’s 500 Index to fall 5 percent to 15 percent.

My picks for 2001 are all value stocks. My clients own all 10 of these stocks, which are listed in alphabetical order.

– Alaska Air Group Inc., based in Seattle, flew above $62 a share in April 1998. Today it skims along at about $27. That is only about 10 times the earnings that analysts expect for 2001. Investors scorn the stock because the airline recently experienced a crash and subsequent questions about its maintenance procedures. Also, rising fuel costs have hurt all airline stocks. But I think Alaska Air will solve its problems on its own, or be acquired by someone who will.

– Banco Latinoamericano de Expor-taciones SA, based in Panama and traded on the New York Stock Exchange, was set up by the central banks of Latin America to finance imports and exports throughout Latin America. I first bought the stock in 1998 at $18 a share, and it has risen to about $31. But it still sells for only six times earnings and less than book value (corporate net worth per share).

– Carnival Corp., with headquarters in Miami, is the world’s largest operator of cruise ships. The cruise industry has been hurt by overbuilding, fare wars, rising fuel costs and publicity about health and safety violations. But in my view, Carnival is less affected than its rivals. Its earnings for 2000 are estimated at $1.62 a share, down a mere 4 cents a share from 1999. Analysts forecast record earnings for next year. Yet the stock stands near $29, down from a high of $51.25 in January.

– Diebold Inc. of North Canton, Ohio, makes automated teller machines. It achieved fast earnings growth through most of the 1990s but has settled down to about 10 percent annual growth. Viewed as a maker of ATMs, this stock is reasonably valued at the current $33.13, or 16 times earnings. But there’s a kicker:

Diebold also makes voting machines, which should be in hot demand if election authorities have learned anything from the 2000 election fiasco.

– Loews Corp. rose about 68 percent in 2000, but I like it for 2001 because it remains quite cheap at seven times earnings and a little under book value. The conglomerate, based in New York, is run by the Tisch family, whose members have been shrewd buyers and sellers of assets over the years. The company owns 87 percent of CNA Financial Corp., all of Lorillard Tobacco, 52 percent of Diamond Offshore Drilling Inc., and various other assets. The risk of continuing lawsuits against the tobacco industry is keeping the stock cheap.

– L.A.’s Northrop Grumman Corp. makes the Navy F/A-18 Hornet fighter jet, military electronics and other aerospace and defense products. It is trying to acquire Litton Industries Inc., the third-largest U.S. Navy shipbuilder (and one of my major holdings). I like this stock at nine times earnings. And I think the whole defense sector is a good bet, as we are in the second year of increased defense spending after 11 years of cuts.

– Occidental Petroleum Corp., also in Los Angeles, is the smallest of the big oil companies or the biggest of the small ones, depending on your point of view. While it is a less-formidable company than Exxon Mobil Corp. or Texaco Inc., it is also much cheaper. It sells at eight times recent earnings compared with price-earnings multiples of 21 and 14 for Exxon and Texaco. The 4 percent dividend yield offers some ballast.

– Scudder New Asia Fund is a closed-end investment company based in New York City that invests primarily in stocks from Japan, Hong Kong and South Korea. I believe a fragile but genuine economic recovery is under way in Asia. Most people seem to doubt that: This fund trades at a 24 percent discount to the value of its holdings.

– Siliconix Inc. is one of my newest holdings. The Santa Clara company makes semiconductor products used in computers, cellular phones and cars. Swept away in the tech-stock slide of 2000, the stock fell from $165 in March to $16.94 late last month. It is trading now at about $23, which is just six times recent earnings and about 1.5 times revenue. The balance sheet is virtually debt-free.

– WorldCom Inc. is another fallen angel. It has plunged to just above $14 from a high of $55.17 a year ago. All long-distance companies have taken it on the chin as price wars have eroded profitability in long-distance consumer voice service. But WorldCom also has other telecom businesses such as the UUNET Internet backbone network and Skytel wireless messaging service. I think the company is a steal at eight times earnings.

If you’re a risk-averse investor, you might want to discard Alaska Air, Loews and perhaps Scudder New Asia Fund from my list. You might substitute stocks such as BMC Software Inc., Brunswick Corp. and Golden State Bancorp.

If you’re an aggressive investor who likes to take big risks in hopes of a big reward, you might want to buy a smaller exploration and production company like Stone Energy Corp. instead of Occidental, and use Casino Data Systems Inc. and Loral Corp. instead of Carnival and Diebold.

Whether you take any of my advice or not, good luck investing in 2001.

John Dorfman is a columnist for Bloomberg News.

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