10 best stocks for 2009: Doing fine

A mid-year review of our market-beating picks for investors.

By Jon Birger, senior writer

NEW YORK (Fortune) -- So far, so good.

Our 10 "Best Stocks for 2009 -- as featured in Fortune's annual Investor's Guide -- have returned 22.5%. That's eight percentage points better than the total return of the Standard & Poor's 500 (SPX) over the same period (from Dec. 1, 2008 through June 25, 2009).

Only one of our picks lost money (Devon Energy), while seven boast double-digit returns. Here's a run-down on all 10:

Altria (MO, Fortune 500)

We thought the cigarette maker would prove to be a good defensive stock, and indeed, Altria has returned 15.1% and still boasts an 8% dividend yield. Better still, new tobacco regulations just passed by Congress -- limiting cigarette advertising and prohibit new flavors -- will help protect the dominant market share of Marlboro and other Altria brands.

Bottom line: Hold.

Annaly Capital Management (NLY)

Our argument for Annaly boiled down to the stock being misunderstood. Since then, the stock has returned 26.9% thanks in large part to Annaly's 14% dividend yield.

Structured as a REIT, Annaly is basically an investment fund that buys Fannie Mae or Freddie Mac-guaranteed mortgages with borrowed money. In this environment that sounds scary. Fact is, with the government takeovers of Fan and Fred, Annaly's business model has never been more secure. Not only that but Annaly's interest rate spread -- the margin between what its mortgages are yielding and the interest Annaly is paying on its debt -- widened to 2.08% at the end of the first quarter from 1.46% the same period last year.

Bottom line: Buy.

Dell (DELL, Fortune 500) delivered at 35.8% total return, but we got a little lucky with this one. We predicted that Dell's market share gains in 2008 would continue into 2009. What happened? Dell has seen its share of the worldwide PC market fall from 14.7% to 13.1%, according to Gartner. Dell's net income fell 63%.

Bottom line: Count your blessings and take profits.

Devon Energy (DVN, Fortune 500)

Devon is basically a natural gas play, which explains why the stock has lost 12.8%. While oil prices have doubled since February, natural gas prices have actually fallen. That cannot hold.

Bottom line: Buy.

Diamond Offshore (DO)

Diamond is a leading offshore driller, and the rebound in oil prices has driven Diamond stock to a 40.9% total return. We still like the stock -- particularly the $8 a year in regular and special dividends -- but there is something of a disconnect right now between oil prices (which are rising) and demand for drilling rigs (which is falling).

Bottom line: Take profits.

Fluor (FLR, Fortune 500)

A construction and engineering firm, Fluor has returned 27.1% with investors betting the company will be a big beneficiary of all the new infrastructure spending included in President Obama's stimulus plan. That's still a wise bet.

Bottom line: Hold.

Johnson & Johnson (JNJ, Fortune 500)

We called it a comfort stock, and the label still applies, despite underperforming the market with a 3.5% total return. Part Big Pharma, part consumer staples giant, J&J boasts a healthy dividend yield (3.6%) and a low price-earnings ratio (12).

Bottom line: Hold.

Medco Health Solutions (MHS, Fortune 500)

The largest pharmacy benefits manager (or PBM), Medcocould be one of the biggest beneficiaries of health reform. President Obama wants to use technology to bring down healthcare costs and that's Medco's forte. The stock has already returned 18.9%, and we think more gains are coming.

Bottom line: Hold.

Pfizer (PFE, Fortune 500)

A classic value play, Pfizer has been weighed down by the healthcare reform debate, which is why it's lagged the market with a 3.7% return. But with a 4.3% dividend yield and a 6 P/E, we're comfortable betting that whatever legislation is ultimately passed, it won't do much to derail the demographic freight train pushing demand for pharmaceuticals ever higher.

Bottom line: Hold.

Potash Corp. of Saskatchewan (POT)

Let this be a lesson. The next time you see a leading company in a growing industry trading at a mere three times earnings, scoop that stock up ASAP no matter how scary the overall market may seem. Potash Corp. is up 66.1% since December. While we remain fertilizer fans, locking in some of those gains makes sense.

Bottom line: Take profits. To top of page

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