Wednesday, July 20, 2005

Sell Google—Buy St. Paul Travelers

Last week I advised investors to become more aggressive in buying stocks. I cited the low valuations (low price-to-earnings ratios) relative to other investment options as the prime motivation for this action. However, I did not make specific recommendations. Today I will make such recommendations with the caveat that any money you lose is yours and yours alone. I will also state that I own each suggested stock in my personal account.

Contrary to Cramer of CNBC fame, I do not necessarily recommend buying the industry leader. These companies, since they are the “industry leader,” already sell at a premium with significant growth priced into the stock. Thus, if they miss expectations, the stock will take a significant negative hit. For example, Google (GOOG) is currently selling for $303. Next year Google is projected to earn $6.70. This means that Google is currently selling at a forward price-to-earnings ratio of 45, or a rate-of-return of 2.2 percent with no dividends. If Google misses the mark next quarter, you will see a substantial sell off in the stock. In my judgment, the downside far outweighs the upside.

I recommend buying St. Paul Travelers Insurance (STA) which is selling for $41.48 with next year’s earnings estimated to be $4.72. This means a price/earnings ratio of 8.8, or a rate-of-return of 11.3 percent with an annual dividend of $0.67. STA’s rate-of-return is five times that of GOOG. I say sell Google and buy St. Paul Travelers.


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