Ten Good Stocks to Buy in 2007

We're going to start the year off with a recommendation for ten good stocks to buy in 2007.  The stocks chosen are based on the theories and research techniques talked about in this publication, and that means emphasis is placed on companies with strong fundamentals.

In this article, we're going to quickly run through a method we're going to use to identify ten stocks to buy in 2007.  Then we'll provide a simple list of the companies that were chosen using this method.  Finally, we're going to finish up by showing you exactly why we're expecting above-average performance from these companies this year.

Good Stocks to Buy

So what exactly do we mean when we're talking about a good stock to buy?  This means we're going to take a step-by-step approach to researching and selecting these stocks including:

Finding Excellent Stocks

One of the first rules in selecting stocks to buy is to only choose excellent stocks.  These are companies that are not selling commodity-type products.  We're looking for companies that can command a premium price for their products because they have strong brand loyalty.

High Intrinsic Value

As investors we always have a choice of investing our money in relatively safe, or risk free, assets such as government bonds.  As long as we're going to be picking stocks, we want to be sure that we're being fairly compensated for the risk we're taking.  That means the company we're going to invest in needs to have high intrinsic value.

Return on Equity

A stock's return on equity is the total return to shareholders in terms of stockholder's equity.  In its simplest form, return on equity is calculated by taking net income and dividing it by stockholder's equity.  This is one of the most important measures of a company's profitability, and the profitability of a company is directly related to its price per share of common stock.

Earnings per Share

Another extremely important measure of a company's financial health is earnings per share, which is how much money a company earned, stated in terms of each share of common stock.  One of the nice features of earnings per share is that we can also look at earnings per share estimates.  These estimates tell us how profitable a company is expected to be in the future, which helps us model a projected growth rate.  That's a very important data point to have when valuing stocks.

Good Stocks to Buy this Year

This list of ten good stocks to buy in 2007 is based on the fundamental values mentioned above, and how well each company is performing relative to its peers in the industry.  We've also taken a close look at some of the ratios of financial condition that can help us to understand how much debt a company is holding, and whether or not they're earning enough money to pay back the debt they owe.  A company's solvency depends on their ability to make their interest payments on time.

Now that we've explained how these companies were picked, here is a list of stock recommendations for 2007:

Ten Good Stocks to Buy in 2007

Why These Stocks Were Picked

These stocks were picked because they met all of the criteria outlined earlier.  In fact, listed below are factors all these companies have in common:

Above Average Profits

All of the companies selected demonstrated they had some kind of brand awareness in the marketplace, or a technological advantage that allowed them to reap above average profits:

• Net Profit Margins - these companies have net profit margins that are above their industry average, meaning they're able to sell their products at a premium price or they can manufacture their products less expensively.
• Return on Equity - all of the stocks picked have a five year return on equity that is above their industry average.

Stock Dividends

All of the companies selected paid some kind of stock dividend.  More importantly, all of these companies are paying higher dividends than they were five years ago.  One of the characteristics we were looking for in companies was a relatively long track record of profitability.  A consistent dividend policy is a good indicator of that ability.

Stock Valuations

We also tried to figure out if the stock was undervalued.  We were looking for "bargain" stocks.  These are often companies that have been ignored by the stock market for some reason.  So we looked for stocks with a price to earnings ratio that was lower than their industry average.

If you connect the profitability measures discussed earlier to this valuation, we now have two forces working in our favor here:  stocks that are exhibiting above average profits, with stock prices that aren't keeping pace with earnings relative to their industry peer group.

Growth Potential

We also wanted to find stocks that not only were profitable, but also were expected to continue to grow profits.  Here we used the five year projected growth in earnings as predicted by market analysts that track and report out on the performance of these companies.

Financial Stability

Finally, we wanted to make sure the companies chosen were financially sound.  Here we looked at their interest coverage ratio and debt to equity ratio.  We wanted to make sure the companies appearing in the list weren't having a problem meeting their debt obligations.

Ranking Stocks

These stocks were pulled from a large universe of exchange securities.  The above ranking criteria were used to see which stocks floated to the top of the list.  The exact method to rank these stocks was a combination of intrinsic value calculations and a projected five-year stock price, which were based on earnings growth rates and price to earnings ratios.

The final filter used was to screen out stocks we believe sold commodity-type products.  For example, the top company based on our ranking system was Companhia Vale do Rio Doce (ADR) stock ticker RIO.   However, this company is engaged in mining, non-ferrous metal production and logistics, as well as energy, aluminum and steel - commodity products.  The mining industry doesn't meet the "excellent stocks" criteria.

Stocks Picked in 2007

Just in case you're not familiar with the stocks picked in this 2007 list, here is a brief description of the company and its business operations:

• Harman International Industries Inc. - developed a range of product offerings sold under renowned brand names, including JBL, Infinity, Harman/Kardon, Mark Levinson and Becker.
• Craftmade International, Inc. - designs and markets ceiling fans, light kits, outdoor lighting, bath-strip lighting and related accessories.
• Becton, Dickinson and Co. - manufactures and sells a broad range of medical supplies, devices, laboratory equipment and diagnostic products.
• United Parcel Service, Inc. - offers package delivery services and supply chain solutions.
• Whirlpool Corporation - manufactures and markets a line of major appliances and related products, primarily for home use.
• 3M Company - a technology company with a global presence in many consumer, healthcare and industrial businesses.
• The TJX Companies, Inc. - operates the T.J. Maxx, Marshalls, HomeGoods and A.J. Wright chains.
• Colgate Palmolive - markets its oral, personal, household surface and fabric care and pet nutrition products in over 200 countries.
• Kimberly-Clark Corporation - its tissue, personal care and health care products are manufactured in 37 countries and sold in more than 150 countries.
• Tupperware Brands Corporation - makes and markets consumer products for the home, principally food storage containers.

Stock Pick Disclaimer

There are many ways to go about picking stocks, and we've mentioned several other methods in publications such as Dogs of the Dow and Dow Diamonds.  The purpose of this article goes beyond publishing a list of stocks to buy in 2007.  It's a demonstration of the sound stock-picking techniques that are talked about here, and how those same techniques can be applied to real world information.

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