Filed under: International markets, Google (GOOG), Apple Inc (AAPL), Cisco Systems (CSCO), Time Warner (TWX), Home Depot (HD), China, Indices, Halliburton (HAL), Altria Group (MO), NYSE Euronext (NYX), Goldman Sachs Group (GS), Duke Energy (DUK), Dow Chemical (DOW), Top Picks 2007, Valero Energy (VLO), PetroChina Co Ltd ADR (PTR), Huaneng Power Intl ADS (HNP), Level 3 Communications (LVLT), Kraft Foods’A’ (KFT), Bargain stocks, Chasing Value, S and P 500, DJIA, Stocks to Buy, Rite Aid Corp (RAD), Savient Pharmaceuticals (SVNT)

This Chasing Value post marks my 400th story for BloggingStocks over the last 18 months. I originally agreed to do about five per month, so I have exceeded what I thought was practical, given my other responsibilities. Through this time I have learned a lot about writing, blogging, editing, the internet, AOL, and have continued to improve my investing acumen, which is a never-ending process. Many of our readers have contributed with some thought-provoking commentary and made this time a more interesting journey. I created the Chasing Value section after discussions with Senior Editor Amey Stone, and it seems to have gathered a modest following. This is the latest installment tracking my 2007 picks.

Through September, the market has benefited from a 0.5% interest rate cut by the Federal Reserve Board, recovering much of August’s losses. This has also stimulated oil and gold prices to new highs and caused the dollar to shrink in value overseas. To some degree I think this resulted in foreign stocks rising significantly, most notably Huaneng Power International ADS which derives 100% of its revenue outside the United States. Last December, I made a strong case for HNP; prior to its recent rise I did so again for our Volatile Market picks: Huaneng Power (HNP) is my pick for the next 50 years.

This year continues to be a stock picker’s market, as the volatile James Cramer of TheStreet.com and I have both topped the indices. Cramer made the best and worst picks for the year among those I’ve been tracking monthly. Apple Inc. (NASDAQ: AAPL) is the best performer among all the stocks and indices in this review, and has stabilized what might have otherwise been a mediocre showing. It has been a good year for energy and tech stocks. The past few months have been dismal for the financial sector, and anything lingering near its giant shadow.

The Dow Jones Industrial Average is once again approaching its high of 14,000 and looks like there might be room to exceed it. The housing market and subprime loans continue to worry investors, but unlike last month when an interest rate cut was not a certainty, the market seems to be betting now that another cut is not far off.

The month of September continued the trend of stock-picking outperforming the indices … again. Earnings reports will be upon us again as another quarter has come to a close. The global economy is still clicking along in a positive direction and September was another month where Chinese stocks did very well. Mergers and acquisitions are showing some signs of slowing or being renegotiated. This is my ninth follow-up where I compare my stock picks to Cramer’s and the indices. For reference, check out my original December 28, 2006 post on the topic.

Summary of Results:

• Google Inc. (NASDAQ: GOOG) has jumped in recent weeks to attain new highs, and once again Wall Street analysts are jumping on the bandwagon. There were two stories in Barron’s (subscription required) that sought to temper investor enthusiasm. The first related to Google’s questionable return on invested capital, and the second questioned whether advertising income could be sustained in a slowing economy. Judging by the recent share price, few investors give much credence to either discussion point. It closed at $567.27, for a solid +22.64% gain through nine months of the year, holding the top spot again. This time by a wide margin.
• Jim Cramer’s average return on his nine picks was 11.9% over the nine months, beating the Standard & Poor’s index, the DJIA and the NASDAQ and changing positions with me this month. Adding the dividend portion of 0.5% (0.66% x 0.75) brings Cramer’s gain to +12.4%. Apple Inc. (NASDAQ: AAPL) was the best pick of the year among those discussed herein. Given new product and software launches and the continuation of current products and programs there is every reason to believe 2007 will finish as another one for the record books.
• My picks continued to advance through September improving to a 9.37% gain year-to-date. Adding the dividend portion of 2.17% (2.89% x 0.75) brings the total return to +11.54% (improving on last month’s +8.08% gain). Dividends make a difference when the returns are modest. Valero Energy (NYSE: VLO) continued to be the most consistent among my top picks — +30.17 — but my best overall pick is now the 46.61% from Huaneng Power International ADS (NYSE: HNP). My biggest disappointment is Time Warner Inc. (NYSE: TWX), which is down over 20%.
• All of the indices gained ground in September, with the DJIA, NASDAQ and S&P all making a good showing for an overall average of +9.9.% year-to-date. Adding their portion of the dividend yield of 1.35% (1.8% x 0.75) brings it up to a total gain of +11.25%, a notable improvement beating out most fixed income securities.

Note that portional dividends have been added to the results. This is one of the criteria I use in my stock picks and it is having an impact on the results thus far. Only three of Cramer’s picks pay dividends, averaging about 0.66%. The indices pay a higher average of 1.8% and my picks average still higher at about 2.89%. Google does not pay a dividend. The flatter the market is this year, the more the dividends will be a factor.

Google has not shined all year, wavering at times as most speculative stocks do, but it was the best bet for the third month in a row, although it was beaten by several individual picks in the group. I still maintain that Value will beat Growth and indexing over the long run. Two of my picks continue to be mentioned as buyout candidates but the rhetoric has died down considerably: The Dow Chemical Co. (NYSE: DOW) and The Home Depot (NYSE: HD). Home Depot continues to receive the most negative discussion in business circles these days, although now the subprime loan mess is stealing headline space on a daily basis. The two subjects have been tied together at the hip lately.

The following are the closing prices as of December 28, 2006 and eight month returns for the seven stocks I recommended, plus the addition of Spectra Energy Corp. (NYSE: SE) that was spun out of Duke Energy (NYSE: DUK). Among Cramer’s picks, Kraft Foods (NYSE: KFT) which was spun out of Altria Group, Inc. (NYSE: MO), is included in the calculations.

1. The Dow Chemical Company: $40.02 is Up to $43.06 (+7.6%) 3.54% yield
2. Duke Energy: $33.02 (incl. of Spectra Energy (NYSE: SE)) is Down to $30.93 (-6.76%) 4.31% yield
3. The Home Depot Inc.: $39.73 is Down to $32.44 (-22.47%) 2.31% yield
4. Huaneng Power International ADS: $36 is Up to $52.78 (+46.61%) 3.62% yield
5. PetroChina ADR: $142.12 is Up to $185.11 (+30.25%) 4.5% yield
6. Time Warner Inc. (NYSE: TWX) $22.00 is Down to $18.36 (-19.83%) 1.1% yield
7. Valero Energy: $51.61 is Up to $67.18 (+30.17%) 0.84% yield

The following index comparisons are also from December 28, 2006 :

• Dow Jones Industrial Average: 12,501.52 is Up to 13,895.63 (+11.15%)
• NASDAQ Composite Index: 2,425.57 is Up to 2,701.50 (+11.38%)
• Standard & Poor’s 500 Index: ($INX): 1,424.73 is Up to 1,526.75 (+7.16%)

The Cramer Speculative Stocks for 2007:

1) Level 3 Communications (NASDAQ: LVLT) $5.66 is Down to $4.65 (-21.72%) No dividend
2) Rite Aid (NYSE: RAD) $5.49 is Down to $4.62 (-18.83%) No dividend
3) Savient Pharmaceuticals (NASDAQ: SVNT) $12.01 is Up to $14.55. (+21.15%) No dividend

The Cramer Growth Picks are:
1) New York Stock Exchange Group (NYSE: NYX) $97.51 Down to $79.17 (-23.17%) No dividend
2) Apple Inc. (NASDAQ: AAPL) $80.87 Up to $153.47 (+89.77%) No dividend
3) Cisco Systems (NASDAQ: CSCO) $27.42 Up to $33.13 (+20.82%) No dividend

The Cramer Value Picks are:
1) Altria Group (NYSE: MO) $86.23 Up to $69.53 +(Kraft at .692024 x $34.51 = 23.88) to $93.41 (+8.33%) 4.12% yield
2) Goldman Sachs Group (NYSE: GS) $200.80 Up to $216.74 (+7.94%) .72% yield
3) Halliburton Co. (NYSE: HAL) $31.26 Up to $38.40 (+22.84%) .97% yield

The New Powerhouse Google

What an amazing month for Google, up significantly, and passing its high prior to dropping after its last quarterly report. The Wall Street darling Google is being tracked since it is of broad interest to the investing public and internet users alike. Google closed December 28, 2006 at $462.56, rose in January, then traded downward for a few months before hitting new highs in June followed by another all-time high of $558.58 in July. A 3-cent earnings miss, based on analysts expectations, caused an immediate drop of about 10%. But Google coming on strong ended the month of September at $567.27, for a solid YTD gain of $104.71 per share (+22.64%), doubling last month’s YTD gain. Google does not pay a dividend.

In Closing

After watching Time Warner falter all year long for what I consider to be no good reason, or maybe there is: Time Warner (TWX): No catalyst or no leadership? Some comparisons I’m dreaming of an invite to a board meeting to share my thoughts personally. I have a feeling Jim Cramer would like to do the same with the board of Rite Aid. I will continue to report during the week following the closing stock prices each month.

One last note: It would be very unusual for someone to expect a beginning investor or novice to hold just a single stock in their portfolio, but if they did, that stock could very well be Google. For that reason, in this unique circumstance, such a person would have beaten Cramer and I at stock picking, and 99% of Wall Street, and doubled the return of the indices as well. Did someone say I would rather be lucky than good?

Disclosure: I own shares of DOW, DUK, HNP, PTR, SE, TWX, and VLO.

To find more potential opportunities and verify my track record read Chasing Value or Serious Money.

Sheldon Liber is the CEO of a small private investment company and the design and research principal for an architecture & planning firm. Check out his other posts for BloggingStocks here.

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