10-for-the-Money... Really?

Barron published a special report on retirement called "10-for-the-money" backed on November 23, 2009. The article has since made its way to the mass media such as Yahoo! Finance on December 2, 2009.

It was a well written article with great facts and figures. But I wonder, why did Barron published such article on a late note? The market has already risen 50% from the March low and now Barron comes out recommending big, giant company that doesn't move much after the move itself. Don't get me wrong, these great companies with strong balance sheet and moat to withstand any economic environment. What this article lag (or shall I say misled) is the fact that most of these companies are "fairly priced" or "over priced" if you look at it based on the current earning and NOT next year's estimate.

Example

Intel P/E is around 47. The average P/E over the past 10 years is 20. The article claim that Intel is cheap because their forward P/E is 13, below historical average. Another word, they are cheap because their future profits are expected to be high relative to price. Earning is estimated to rise 100%. This kind of talk is similar to the housing boom when realtors would say "buy it now because you will profit next year".

At the low, Intel was trading less than 15 times actual earning (see chart below). On top of that, their dividend yield reached 4.5%!!! Although the payout ratio didn't really make sense and appeared to be unsustainable, it proved to be a good buy then. I didn't buy it then because of the payout ratio but any great value investor would be all over it.

I guess what I don't believe (may be I don't understand) is that this article didn't say anything about these stocks being "cheap". Surely using forward earning can make it look cheap but why not can go to 2011, 2012, 2013, or 2020 earning and call it cheap. After all stocks are seen as perpetual.

The recommendation, I believe, is based on the sector rotation analysis which is preached by Jim Cramer. I know this well because I read his book twice! At the end of the day, this is "market timing" with fundamental cover up. When you say things like "the rally's second phase, the high-quality stocks will be the drivers" you are assuming that the rally will continue. But wait! if it doesn't "And if the rally fades, they offer downside protection through their dividend income." If this analyst is right, second phase will end, what then will retirees do after buying these 10 or 20 stocks? Dividend? Come on.

Pardon my lingual, but it's a bunch of B.S. to me. The article claim that the retirees need to be in these names but I see the margin of safety is so small. What retirees need are first and foremost, margin of safety. There are three directions stocks can go: up, down, or sideways. If you stocks do not fall and chances of it going up is 50%. But after a 100% run up for some of these stocks, why would investor care for 4% yield. All they'll think about is protecting their 100% gain.

Sorry Barron, this could have been a great article if it was published at the right time. Now it appear to be irresponsible and I'll have to explain to my parents why they shouldn't buy any of these names.

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