Sometimes Slow And Steady Wins The Race

Stock tips and recommendations are everywhere.  Investing and trading strategies ran the gamut from highly complex mathematical algorithms to bottom fishing turnaround plays to go-go momentum plays.

But then there are the companies that are just good at what they do, and just make money quarter after quarter, year after year.  Sometimes these companies are forgotten because they are not sexy, or they are not in the news or the press every day.  One of my favorite stocks for 2007 is this sort of stock.  I like Moody's (symbol MCO). 

This is the sort of stock that puts most people to sleep.  They are in the credit rating business and risk assessment business.  It's not sexy like Google.  It's not a household name like Starbucks.  It's an old company is a dry, boring, and highly profitable industry.

I will start with the fundamentals.  Moody's makes money selling and managing information.  As the capital and derivative markets continue to become more complex and more global, the need for information and the market for it grows.  They are benefiting from the current trend if increasing debt issuance from both government and private industry.  This company has great revenues(est . $1.99 billion for 2006), excellent growth (20%) and great margins (54% for the most recent trailing 12 months, and higher than industry averages).  Free cash flow for 2006 is estimated at $660 million.   The stock even pays even a small dividend.

Now look at the technicals.  Moody's is currently trading around 71.  It is approaching a 52 week high of 73.  It seems to be consolidating in the $70 to $722 range.  It is in a long term uptrend, and trading above the 20, 50 and 200 day moving averages. The stock sold off last spring when earnings growth was slower than expected.  This seems to have been a single quarter problem, but the chart shows what can happen when a stock disappoints.   4th quarter earnings will be released Feb 7th.  If the stock breaks above the prior high on good earnings, there is no overhead supply to hold it back.

So what do you do?  I say buy it now, before earnings.  The current consolidation provides a good entry point.  I would recommend a stop below 68.  Since this stock has had a good run over the last few months, I would consider a pull back on the earnings news to be likely, even if they beat estimates.  A few days of churning are likely, but the trend will probably remain intact. 

I expect this stock to continue to grind higher this year.  It will not be in the headlines, it will not be spoken of in breathless tones on the TV, but it could easily return 15% this year. 

Full disclosure: I am long MCO, and currently have my stop at $67.68.