Five Stocks for Five-Year Investors

• ByTim Melvin, RealMoney.com Contributor
• On 12:00 pm EDT, Thursday March 12, 2009

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I received an email yesterday from a good friend here on the island which is not Manhattan, asking for advice on what to do with his retirement plan. This particular friend is one with whom I have spent an enormous amount of time careening over the waves, happily discussing politics, markets and economics at 70 miles per hour. In his activities on the water he is a bit of a risk-taker, but he wanted some solid stocks that he could just buy and forget about for the next five years.

He is a pretty knowledgeable guy, and I was confident that he would in fact buy those stocks and then forget them for five years. When I was finished suggesting those names, I realized that his question had given me a pretty good column.

We are dealing on a daily basis with the conundrum of a weak economy and stocks that are very cheap on the basis of assets and future earnings. There are still very real pressures that could well take overall market prices lower in the months ahead. I truly hope I am wrong, but I am not in the "market has bottomed" club. So, with the caveat that there is a real chance that every one of these stocks will go lower in the short term, and that all of these are in my eyes stocks to buy and just forget about for five years, here are the names I suggested.

My first pick is Southwest Airlines. It remains one of the low-cost providers and has the best balance sheet of any of the major airlines. Southwest will be standing and in good shape when the recession ends.

I fly often, especially to Florida and Chicago, and have developed a preference for Southwest over other carriers. Now that it has modified the cattle-call boarding approach, it consistently provides the most satisfying travel experience. The company has grown into the largest domestic airline in the U.S. and along the way has turned in 36 consecutive profitable years. The stock trades below tangible book value, and in my mind it is a steal at these levels for long-term investors.

No one will be surprised by my second pick, since I have written about it several times. The collection of media and entertainments assets that make up Walt Disney are worth a lot more than they trade for at today's market price. Since I have written about it a lot in recent weeks, I'll just say that a five-year bet on Mickey Mouse is a good one in my eyes.

The easy five-year pick in technology stocks would be Microsoft. It dominates several sectors of the software industry, and this stock is as cheap as it has been in more than a decade. I believe it would be a good five-year stock, but I believe Dell would be a better one. Dell is probably going to struggle in 2009 as the recession remains in place. It is particularly exposed to the slowdown in commercial sales, and that probably is not going to turn around for several quarters.

Dell has an enormous stockpile of cash and is aggressively moving to cut costs. The company has over $9 billion in cash, which equated to better than half the current stock price. It is in a position not to just to survive but to use its cash to pursue opportunities created by falling stock prices.

My high-speed friend wondered, as does everyone these days, about buying one of the big banks like Wells Fargo or Citigroup. A five-year portfolio should probably include a financial stock or two.

I would stay away from the majors at these levels, although I could be talked into buying BB&T should it drop further. Citigroup is basically an undated option at this point, and Wells is facing huge problems from option ARM resets this year and into 2010.

For five-year purposes I am going to lean more toward a smaller regional player like Susquehanna Bancshares. The bank has the same problems in the near term as everybody else, with deteriorating credit quality and pressure on interest margins. If, however I take a five-year look, I see a strong franchise in the mid-Atlantic region that trades below tangible book value. When the banking sector recovers, it becomes a takeover candidate in my opinion. The company pays a great dividend, but I will not be surprised to see that reduced in the near future. In the banking sector, I also believe there are hundreds of micro-cap community banks with outstanding return potential for five-year investors.

Stocks are very cheap on an asset basis and earnings potential basis right now. In the near term, we are probably going to see pressure for a poor economy and very weak current earnings. If you are capable of buying stocks with a five-year view and ignoring current price volatility, there are incredible opportunities in this market.

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