Thoughts for 2006

I’m not going to make any broad market predictions for 2006. I’m always awful at those. Hey, I thought the Colts were going to go undefeated. The real news happens in places where most people aren’t looking. That’s the thing about financial markets. The surprises are so surprising because no one expects them. Weird, huh?
We all know what’s going to happen with General Motors (GM), but who will say the same about Wal-Mart (WMT)? The only truism is that you should never say “it can’t happen.” Here are a few quick thoughts on the year ahead.
Stocks to Sell Right Now
I truly love my local Whole Foods (WFMI). The stock split today and it was just announced that it’s being added to the S&P 500. That’s an odd coincidence, and I’m going to take it as a sign. Whole Foods’ stock is WAY too expensive. The forward P/E ratio is slightly higher than Google’s. Simply put, Whole Foods shouldn’t be where Google is. Come to think of it, Google shouldn’t be where Google is.
Every year I think Panera Bread (PNRA) is about to crash and burn and I’m always wrong. So why should I stop now. There’s no question that Panera is a big hit. The restaurants are Starbucking their way across the continent, and the company has a solid balance sheet. But still, $67? I don’t think so.
No one has gotten better press this year than Hewlett-Packard (HPQ), but the company still has a long, long way to go. I can’t wait for Carly’s book, which should be coming out soon. This will be a rare instance of pride coming both before and after the fall. HPQ still doesn’timpress me. Yes, when you lay off 15,000 people, you’re able to see an improvement in your financials. The real trick is getting good press while you’re doing it. My prediction is that Mark Hurd’s honeymoon with Wall Street will come to an end.
There’s something about Lehman Brothers (LEH) that I just don’t get. Every quarter they put up great numbers. I can’t put my finger on it, but I don’t see where all the growth comes from. How can they consistently do what others can’t? Maybe the company really is that good. Maybe not. Personally, I’m rooting for the yield curve
Also, Google (GOOG). Sorry sports fans, not this year. There’s just too much baggage.
Stocks to Watch
If Citigroup (C) decides to spin-off Smith Barney, that could be one of the best opportunities in years. I so want this to happen, it just makes sense. The larger Citi is weighing down a very good business unit.
What will happen with Cendant (CD)? I don’t know but I’d love to see the new structure succeed. More companies on Wall Street should be broken up.
Patterson Companies (PDCO) has been a great stock for years, but the company has fallen on hard times. Here’s an important investing lesson: Companies aren’t like sports teams that suddenly hit slumps. When earnings get hit for a few quarters, there’s usually something very wrong. I hope Patterson can get back on track.
Who will do better this year, Merck (MRK) or Pfizer (PFE)? I’m not going near either one, but I’m rooting for Merck. If I were smarter, I’d make a paired trade—long Merck and short Pfizer. It could the smoothest line we’ll see all year.
I can’t wait to see how well Danaher (DHR) does this year? It’s on the Buy List for 2006. The stock hasn’t done much recently even though earnings continue to grow and grow.
Oracle (ORCL) is always fun to watch. This is another stock that I won’t go near. They have many problems, but I never count Larry Ellison out.
Trust me, the least-important stories this year will be Ben Bernanke, the Fed or the mid-term elections. The status quo will probably hold across the board. The big story to watch is what’s happening in China. We’ve never seen anything quite like it.
As Americans, we’re not used to having our economy knocked around by someone else. Other countries worry about a recession in the U.S. because it will impact them. The thought never even occurs to us. For the first time, Americans may start to worry that rough times in China will mean rough times here. The emergence of China is the story of our times.

Posted by on December 28th, 2005 at 10:46 am


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