10 stocks for 2007 and beyond

By Jim Jubak

The end is nigh! The end of 2006, that is. Time for every guru from Wall Street to Mumbai to pick "10 best stocks for 2007." I added to the deluge with my own column on Dec. 8.

Now it's time for my anti-end-of-the-year piece. Call it "10 stock picks for investors who don't care about the calendar."

The year-end stock-pick piece is a time-honored way to sell papers. Or, these days, to generate Internet clicks. But the project isn't totally self-interested. An investor who can get the trends right before the year starts and then pick the right stocks to ride stands to make a handsome profit in the 12 months ahead.

Of course, doing that isn't especially easy, which is why the reward for getting it right is so high. Not only do you have to call the trends correctly, but you have to get the timing right. Warren Buffett, no investing slouch, bet heavily on a falling U.S. dollar in 2005. Right trend. Terrible timing. The result? A $955 million loss for his company Berkshire Hathaway (BRK.A, news, msgs) that year.

The great weighing machine

No wonder so many fundamental investors don't bother with trends and timing. In the short run, they say, the stock market is a popularity contest with investors voting -- on superficial grounds -- for the stock most likely to succeed. In the long run, they maintain, the stock market is a weighing machine that will accurately reflect the long-term pluses and minuses of every stock. Buy the best fundamental stocks you can find, don't worry about the market's temporary emotions and wait for investors to eventually recognize those fundamentals in the stock's price.

"Eventually" can be a long, long time. That's one of the reasons that I personally don't advocate throwing all attempts at spotting and timing trends out the window. Looking at top-down and often-emotional trends can be a very good way to shorten the length of the "eventually" I have to hold a stock before the market recognizes its fundamental quality.

But I do get the fundamentalists' point. Top-down trend timing can easily overlook great stocks that don't fit into a clearly defined trend. And top-down trend timing can easily keep an investor overly focused on the short term. A year is, after all, just four quarters long.

Top-down in this context is starting with your predictions for the big macro trends and then moving to find stocks you think will do well under those economic circumstances. Contrast that with bottom-up, where you look at the details of a company's business as a way to decide to buy or not.

So in this list of 10, I've thrown to the wind any attempt to time the trends of 2007 and gone after stocks with great fundamental stories that might or might not earn market recognition in 2007. These companies have such great fundamental stories behind them that I'm willing to hang on for an "eventually" or two. My list of "10 picks for investors who don't care about the calendar" are American International Group (AIG, news, msgs), Archer Daniels Midland (ADM, news, msgs), Gol Linhas Aereas Inteligentes (GOL, news, msgs), Iberdrola (IBDRF, news, msgs), Ito En (ITOEF, news, msgs), Itron (ITRI, news, msgs), Navteq (NVT, news, msgs), Nokia (NOK, news, msgs), Praxair (PX, news, msgs) and Tejon Ranch (TRC, news, msgs).

Some of these are already members of Jubak's Picks, a couple I'll be adding immediately with this column and the others I'll be adding as 2007 progresses and I clear room for them in the portfolio.

10 for 2007 and beyond

Here's a quick line on why I like each stock, and a note on whether I already own it in Jubak's Picks, whether I'm buying it today or whether I'm putting off a buy into 2007.

American International Group is still working its way back into investor favor after a series of scandals that led to the ouster of longtime CEO Hank Greenberg and the restructuring of a system of affiliated companies designed to reward company executives outside normal channels of compensation. But no life insurance company in the world has American International's reach in the world's developing markets. The company has dominant positions -- for example, the company is the only insurer to own 100% of its subsidiary in China -- in developing markets that generate 10% of global premiums. But insurance accounts for only 1% to 2% of GDP in these markets compared with the 4% to 8% common in developed economies. The growing middle class of China, India and the rest of the developing world has just started to consume life insurance. Status: American International is a current Jubak's Pick.

Archer Daniels Midland is uniquely positioned as a trader, processor and producer of the grain, seed and oil-feed stocks needed in increasingly volumes by the developing biofuels industry. On the energy production end, the company, already the largest ethanol producer in the United States, is branching out both in geography and in feed stocks. If there's a potential biofuel somewhere in the world, Archer Daniels Midland wants to be there to trade it, process it and turn it into energy. That competitive advantage should enable the company to gradually increase the historically low margins of its commodity businesses. Status: Wait to add.

Gol Linhas Aereas Inteligentes is building a low-cost airline in Brazil (and to international destinations in Argentina, Bolivia, Paraguay and Uruguay) on the model of Southwest Airlines (LUV, news, msgs). As of the end of 2005, Gol Linhas Aereas Inteligentes was operating 420 daily flights to 45 destinations using a fleet that included a core of 42 single-class Boeing 737s. The company also owns 25% of the voting stock in a joint venture to create a low-cost airline in Mexico. Like all airline stocks, this one goes up when fuel prices go down and down when fuel prices increase. But the long-term fundamental story is the growth of cheap air travel with the rise of incomes in developing economies such as Brazil. Status: Wait to add.

Iberdrola is taking big heat from investors right now who think the company is overpaying to acquire Scottish Power (SPI, news, msgs), the fifth largest energy company in Britain. But I see this as a shrewd bet on the direction of energy regulation in the European Union. Spain's second largest utility is already the biggest producer of electricity from wind power in Europe. With regulators pushing to increase the European Union's production of energy from renewable sources to 12% by 2010 from 6% now, Iberdrola would be in a position to reap the returns from any subsidies and emissions-trading schemes the European Union puts in place in order to reach those goals. Scotland also has huge wind-power resources. It is, along with Spain, among the windiest countries in Europe. Status: Wait to add.

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