3 Stocks on My Shopping List

Last week President Obama recommended buying stocks, and when the Commander in Chief speaks, I listen.

I took his advice.

Well, not really. I did buy stocks, but not because of the president. I happen to agree with his observation, which is that the stock market at these levels is very attractive for long-term investors. But I feel a bit uneasy when the president himself dispenses personal finance advice. I wouldn’t want to see Suze Orman as Secretary of the Treasury, either.

Coincidentally with the president’s remarks, the Nasdaq Composite dropped below my latest buying threshold, which was 1300, marking a 60% decline from the last peak it hit in October 2007. That’s why I was buying, which surely comes as no surprise to regular readers of this column. I am steadfastly following the disciplined system of buying lower and selling higher that saw me through the collapse of the tech bubble in 2000, after which the Nasdaq dropped by roughly 75%.

Despite the many recent articles arguing that the world has changed -- that stocks will never recover and reach new highs; that consumers will never spend again; and that we are doomed to a Japanese-style deflation that may last years, even decades -- I remain steadfast in my commitment to the simple proposition that stocks will outperform all other investments over time, as they have since the records were first maintained.

This time I was prepared with a shopping list, partly because this threshold has been months in the making, unlike the dizzying drop last fall. I could make the case that with stocks this low, investors should be taking an aggressive stance, buying shares of companies that have been beaten down the most and are most likely to benefit from a rebound (General Electric (GE) comes to mind.)

But in a concession to the bleak economy, I went for defensive stocks — but not too defensive. I started by screening for stocks with a dividend yield of at least 3%, something to tide me over in the event of further declines. At the same time I looked for growth— both to make sure those dividends are secure, and to benefit from any recovery. If these companies can show revenue and earnings growth over the past year, then imagine what they can do in better times. I paid no attention to usual valuation measures, like price/earnings ratios.

My screen produced just 17 survivors. After eliminating anything having to do with financial services, energy, mining and real estate (on the grounds that their earnings are likely to deteriorate this year), as well as utilities (growth prospects too low), I had just three contenders: Quality Systems (QSII) (heath care), Shaw Communications (SJR) (cable, TV and satellite), and The Buckle (BKE) (retail). (Another survivor was TMX, which operates the Toronto Stock Exchange and trades in Canada.)

I was instantly captivated by Quality Systems, which is an information technology company for hospitals and other health-care providers. Obama's health-care proposals all but guarantee more data requirements, as well as a stress on cost reduction and efficiency. What could be more timely? Plus, the company clocked 17% and 36% earnings and revenue growth, respectively, in its most recent quarter. The stock has jumped since I bought it, but at about $40 it's still well off its 52-week high of $47.94.

I also bought General Mills (GIS), a company I've been eyeing for some time as consumers eat out less and focus more on branded grocery products. GIS showed a remarkable ability to hold market share and maintain prices as its raw materials costs soared last year. Now, like Heinz (HNZ), which recently reported solid earnings, it’s been able to increase profit margins as commodity prices fall. General Mills recently raised fourth-quarter projections but at a recent price of $50 is still well off its 52-week high of $72. I’m confident this stock isn’t going to keep me up at nights while I collect its almost 3.5% yield.

Rounding out my shopping was Amazon (AMZN), which I recommended some weeks ago. My notion was confirmed this weekend, when I did some online shopping and discovered that Amazon was, indeed, the low-cost retailer, even compared to Wal-Mart (WMT) (thanks to the free shipping I receive as an Amazon Prime customer). I lowered my cost (I could argue that Amazon is still somewhat pricey) even further by selling some calls at a very large premium.

As I write, the market is experiencing a rare rally, which naturally comes as a relief. But even before this, I felt good about buying these stocks. Maybe it’s the simple psychological effect of doing something when you feel at the mercy of forces beyond your control. But maybe it’s something more profound. After years of practice, maybe I’m getting my emotions into line with my rational conviction. Which is, to echo the president, that this is a great opportunity to buy, no matter where the market goes in the next weeks or months.