Stocks That Almost Made the Cut: February 2006

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February 1, 2006 | S.T.A.M.T.C | | Author Asif

While VA Software (LNUX) was an easy pick for this month’s SINLetter, I had a rather difficult time deciding on my second pick. After featuring Pfizer (PFE) last month, I wanted to pick one more stock from the healthcare sector. Genentech (DNA) was a very strong contender especially after its recent pull back to the $86 level from almost $100 per share just a few weeks ago. The company has been growing at an annual rate of around 30% over the last five years and expects to grow earnings between 35% to 45% in 2006. Genentech also garnered the number 1 spot in Fortune magazine’s list of 100 Best Companies To Work For In 2006. According to Fortune, job applicants may have to face up to 20 interviews before they get a job at Genentech and this was correlated by what I heard from a friend a few months ago about Genentech. So why did I pick UnitedHealth Group (UNH) instead? At 13.66 times current sales and 72.81 times current earnings, I felt that Genentech is still richly valued and there may be additional downside to this stock. The market was a little spooked after Genentech released sales numbers which fell short of market expectations for Avastin, one of its key drugs. Richly valued stocks can fall precipitously even at the hint of bad news and I plan to continue watching Genentech closely over the next few months.

Timberland (TBL) makes some of the best light hiking shoes I have ever tried and I also like their apparel. After recently noticing their sweaters selling for $100 (read high profit margins) at a store, I checked into the stock as a possibilty for this month’s SINLetter. Growing inventory and anemic earnings growth put Timberland out of the running. I finally decided on UnitedHealth Group on account of its projected earnings growth, reasonable valuation and excellent product.

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