The outlook for the Nasdaq Stock Market as a whole looks unfavorable to me. Still, there are Nasdaq stocks I like.
Cincinnati Financial Corp. (Nasdaq: CINF), Tuesday Morning Corp. (Nasdaq: TUES) and Jos. A. Bank Clothiers Inc. (Nasdaq: JOSB) look like solid values to me.
I wish I could say the same for the Nasdaq Stock Market as a whole. Its 3,167 stocks sell for 44 times the past four quarters' earnings, and 26 times estimated 2006 earnings. Those are high multiples.
I predict the Nasdaq Composite Index, which closed June 16 at more than 2100, will fall to 2000 or below in the next 12 months.
My record as a Nasdaq seer is mixed. I correctly predicted declines in 2000 through 2002, and a rise in 2003. Since then, however, my predictions have been off.
I expected moderate declines in 2004 and 2005. Instead, the Nasdaq Composite Index rose 9.2 percent in 2004 (including dividends) and 2.1 percent in 2005.
The eight largest stocks in the Nasdaq Composite -- Microsoft Corp. (Nasdaq: MSFT), Cisco Systems Inc. (Nasdaq: CSCO), Intel Corp. (Nasdaq: INTC), Google Inc. (Nasdaq: GOOG), Amgen Inc. (Nasdaq: AMGN), Oracle Corp. (Nasdaq: ORCL), Qualcomm Inc. (Nasdaq: QCOM) and Dell Inc. (Nasdaq: DELL) -- account for 25 percent of the index's value. The fate of the index, therefore, rests in large part in the hands of those eight stocks.
I like Intel at 14 times earnings but am not wild about the other seven. I think that Qualcomm is overpriced at 31 times earnings and that Google is more overpriced at 58 times earnings.
Every year beginning in 2001 I have recommended a handful of Nasdaq stocks that I believe are good values.
The average one-year gain on these lists has been 42 percent. By comparison, the average one-year gain in the Nasdaq Composite Index has been 7 percent.
All five of my Nasdaq recommended lists have beaten the index, sometimes narrowly. Last year's picks rose 13 percent from June 23, 2005, through June 16, 2006, led by a 63 percent gain in Rofin-Sinar Technologies Inc. (Nasdaq: RSTI), which I own for some clients.
The Nasdaq index was up 7.6 percent for the period. All figures include dividends. Here are my latest Nasdaq picks.
Cincinnati Financial, based in Fairfield, Ohio, sells property and casualty insurance, engages in leasing and financing activities and offers investment management services.
Cincinnati Financial stock sells for 15 times earnings, 1.3 times book value and 1.8 times revenue, all reasonable multiples in my opinion. It yields 2.9 percent in dividends.
Yet the picture is better than it appears. Cincinnati Financial owns almost 13 percent of Fifth Third Bancorp (Nasdaq: FITB), a banking company with a market value of more than $20 billion.
If you adjust for that holding, Cincinnati Financial sells for only 10 times earnings from operations.
Another thing I like about Cincinnati Financial is that John J. Schiff Jr., chairman, has an appetite for his own stock, owning 8.49 million shares.
Next, I suggest buying Tuesday Morning, a Dallas-based closeout retailer of upscale home furnishings and gifts. Examples of the items you can buy at discount at a Tuesday Morning store are Waterman pens, Royal Dalton china and Ralph Lauren bed linens.
The stock seems well discounted itself, selling for less than 10 times earnings and yielding 5.8 percent in dividends.
Tuesday Morning's past two quarters' earnings have been below those of a year prior. That's disappointing, but in my opinion the stock has been punished excessively. It sells for less than $14, down from more than $36 in December 2004.
Third, I like Patterson-UTI Energy Inc. (Nasdaq: PTEN), a drilling company with headquarters in Tyler, Texas. I am not completely objective about Patterson as my wife owns some shares.
Profits at Patterson have marched upward to $373 million in 2005 from $37 million in 2000. Of course, the past five years have generally been good ones for drillers. Yet I take some comfort in the fact that Patterson has turned a profit in 13 of the past 15 years.
The stock sells for only 10 times earnings, and I love the debt-free balance sheet.
Fourth, I recommend Columbia Sportswear Co. (Nasdaq: COLM), which I own personally and for some clients. In the past five years, the Portland, Ore.-based outerwear and sportswear company has averaged 17 percent annual earnings growth and 13 percent sales growth.
The stock sells for 12 times earnings and 1.4 times revenue. Debt is less than 4 percent of equity.
Jos. A. Bank Clothiers Inc.
I'll wind up my recommendation list with Jos. A. Bank Clothiers Inc., a retailer of men's suits and office wear.
Jos. A. Bank stock had risen six years in a row through 2005, climbing to $34.73 from $1.28 a share.
Things were still going well as of June 7 this year, when the stock closed at $37.13. The next day the stock slid 29 percent in its own private crash.
That day, the Hampstead, Md.-based company announced that net income for the quarter ended April 29 fell to $5.86 million from $6.74 million the year before. It said that it had to cut prices to sell winter clothing that had failed to move.
I think investors overreacted. After all, Jos. A. Bank has been profitable in 13 of the past 14 years. The trend toward casual wear at the office seems to have run its course, and probably reversed. I suspect the next few years will be good ones for Jos. A. Bank.
Dorfman is president of Thunderstorm Capital in Boston and is a Bloomberg News columnist. The opinions expressed are his own. His firm or its clients may own or trade investments discussed in this column.