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Mon 27 Dec 2010 01:04 PM

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Goldman, Intel are on my Top 10 list for 2011

As investors make their 2011 resolutions, many should resolve to take on more risk, says John Dorfman

Goldman, Intel are on my Top 10 list for 2011
History shows that the stock market is the right place to keep a percentage of your money

Seared
by losses in 2008, millions of investors have slashed their stock allocations,
preferring the relative safety of bonds or cash. This represents a triumph of
fear over experience.

History
shows that the stock market is the right place to keep a percentage of your
money. For most people, I recommend 60 percent of liquid assets. In the 30
years from 1980 through 2009, the compound average annual return in US stocks
was 11 percent. So far this year the Standard & Poor’s 500 Index is up 15
percent, including dividends.

Yes,
2008 was awful. And no, you shouldn’t have money in the market unless you can
afford to risk its loss. Yet owning a piece of American businesses has been a
wise strategy, long-run. In that spirit, here are my 10 favorite stocks for the
coming year.

I
expect the information-technology sector to have a good year in 2011 as the
economy picks up, so I will start with two technology companies. One is Western
Digital Corp, which I believe is undervalued at six times earnings. The Lake
Forest, California, company is the world’s second-largest maker of computer
disk drives in terms of revenue. In its last fiscal year, which ended in June,
Western Digital increased its earnings to $1.4bn from $470m the year before.

The
other tech company I like is Intel Corp. This year nine Intel insiders have
bought their company’s shares. In addition, Intel raised its dividend six times
in the past five years. Both of these are indicators that management believes
better times are ahead.

I
also have two selections in the energy industry. Transocean Ltd, with
headquarters in Vernier, Switzerland, appeals to me as a leader in deep-water
drilling. The stock took a whack in 2010 because of the Gulf of Mexico oil
spill; it owned the rig that blew up and sank. Its 16 percent decline this year
sets it up for a rebound in 2011, I believe.

The
stock sells for only 10 times earnings.

GT
Solar International Inc, based in Merrimack, New Hampshire, has had a good run
this year, up about 62 percent. Yet it sells for only 10 times earnings, and I
believe there is room for further gains. The company makes furnaces that melt
and purify silicon for use in solar panels. More recently it has developed furnaces
for making synthetic sapphires used in light- emitting diodes. The company is
debt-free.

In
the financial sphere, my choice is New York-based Goldman Sachs Group Inc. The
investment bank has been vilified for betting against a mortgage security it
created, for high- speed trading and for paying its executives handsomely.
These criticisms have helped to whittle Goldman’s stock price down to about
$168, which is less than nine times earnings. That’s a low valuation for a
talent-rich company.

I
like several of the big drug companies, notably Johnson & Johnson. The New
Brunswick, New Jersey, company has increased its dividend five times in the
past five years. Its stock, which has sold for a median of 18 times earnings
the past decade, currently fetches only 13 times earnings.

I
think owning some Chinese stocks is desirable. China’s economy is currently one
of the fastest- growing in the world. Its budget is in better shape than the US’,
and its population is younger.

One
Chinese company I like is China Advanced Construction Materials Group Inc,
which produces concrete and provides technical advice for large development and
infrastructure projects such as high-speed railroad beds. The company has headquarters
in Beijing, but its stock trades on the Nasdaq market in the US. It sells for
only four times earnings.

Rounding
out my list is a risky pick, Amedisys Inc. The Baton Rouge, Louisiana-based
home-nursing company is under investigation by the US Justice Department and
two other agencies on suspicion that it overcharged Medicare. The likely
outcome in my opinion is an out-of-court settlement. It’s worth remembering
that without home nursing for elderly patients, many would be hospitalized, an
unpleasant and costly alternative.

Some
perspective: Before investing in stocks, you should have the equivalent of six
months’ salary in a savings account, adequate health insurance and life
insurance if you have dependents.

(John
Dorfman is chairman of Thunderstorm Capital in Boston. The opinions expressed are his own. His firm or clients may own
or trade securities discussed in this column.)

 

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