Nasdaq 100 Watch List: January 11, 2013

Below are the Nasdaq 100 companies that are within 10% of their respective 52-week lows. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and rigorous due diligence.

Symbol Name price P/E EPS Yield P/B payout ratio % from yr low
MSFT Microsoft Corp 26.83 14.5 1.85 3.5 3.24 49.73% 2.17%
DLTR Dollar Tree, Inc. 38.12 15.32 2.49 - 5.63 - 2.69%
BBBY Bed Bath & Beyond 56.27 12.85 4.38 - 3.17 - 3.57%
TEVA Teva Pharmaceutical 38.06 15.51 2.45 2.1 1.47 33.06% 3.90%
VOD Vodafone Group  26.59 - -0.55 3.8 1.17 -185.45% 6.57%
PAYX Paychex, Inc. 31.78 20.64 1.54 4.1 6.82 85.71% 9.13%
NVDA NVIDIA Corporation 12.21 15.24 0.8 2.5 1.62 37.50% 9.51%
CA CA Technologies 23.34 11.84 1.97 4.3 1.97 50.76% 9.53%
^NDX NASDAQ-100 2,748.26 - - - - - 15.19%

Watch List Summary

Microsoft (MSFT) is the first stock on our list this week.  Anyone who has considered this stock has probably heard the controversy about why the stock price hasn’t gone anywhere in the last several years. In fact, MSFT trades today where it did in June 1998 as seen in the chart below:

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And while the stock could easily continue to trade in the same range that it has since the 2001 low, the long-term pattern suggests that the company is fast becoming the biggest value play.  This reminds us of Wal-Mart (WMT) when it was trading in a similar long-term trading range.  On June 18, 2009, we quoted Samuel A. Nelson, the man who coined the term “Dow Theory,” in an article titled “Values Biding Time.”  In that article, Nelson says “Values go on increasing, while the market rests…”

Well, in the case of Microsoft, it has certainly rested.  We recommend buying MSFT in two stages, once at the current price and a second time at or near the $20 level.  The stock should be considered for 10% of your portfolio on the first purchase and an additional 10%-15% for the second purchase.  Keep in mind that the outside possibility exists that MSFT could decline to the 2009 level.  If you’re concerned that the stock will decline to the $16-$15 price, then making your first purchase at the $20 would be the more conservative choice.  Most of the fundamental data supports your review of MSFT as a core holding at the present time.

Another stock of particular interest is Paychex (PAYX).  The stock just barely within 10% of the 1 year low and may be a compelling value at this time.  The last time PAYX was on our Nasdaq 100 Watch List and within 10% of the low was August 12, 2011, when the stock traded at $26.66.  From that point, PAYX rose +30.16% to the $34.70 price on September 21, 2012.

PAYX has a long history of dividend payments.  Additionally, the company has an implicit support/backing by the government as politicians from both parties are trying to create jobs no matter what the short or long-term cost.  This suggests that PAYX and Automatic Data Processing (ADP) are poised to garner a share of the payroll processing associated with any and all new jobs created.

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Of particular concern for PAYX is the high dividend payout ratio.  While 85% is “acceptable” for a utility, you never want to see a non-utility hit the 80% to 100% level.  Downside support levels are at $31, $29, and $25.  We would initiate purchased of this stock in three stages once the stock declines below the $31 level.

In our watch list from December 24, 2012, the top three stocks mentioned were Activision Blizzard (ATVI), Vodafone (VOD) and Teva Pharmaceutical (TEVA).  The performance of those three stocks has been ATVI up +7.87%, VOD up +5.85% and TEVA up less than 1%.  As ATVI approaches the 10% threshold, we recommend considering an alternative to the stock.  This does not mean the stock has to be sold, however, when the market provide an annualized return greater than 200% it should be considered a gift and alternatives should be considered just in case.

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