4 Great Stocks For Year-Ahead Gains

12/19/2011


In this space, we have historically presented our top capital-gains selections for the year ahead. This year, we are eschewing themes and introductions, because we know that what our readers value most are quality stock picks. With that in mind, here are four of our favorites for 2012.

Agilent Technologies ($33; A) has not helped the Focus List's performance in recent months. The shares have declined 13% since Nov. 15, when the company reported higher-than-expected profits but somewhat disappointing orders for its largest business segment. Over the last six months, Agilent fell 30%, versus a decline of just 4% for the S&P 500 Index. Some of Agilent's rivals reported weak operating results, and fears of slowdowns in research spending and the overall economy also weigh on these shares.

But Agilent has grown per-share profits at least 27% in each of the last seven quarters. Sales jumped 21% and operating cash flow 75% over the last year. The consensus projects per-share-profit growth of 7% for fiscal 2012 ending October and 11% in fiscal 2013, with estimates trending higher. Two of Agilent's three business segments, life sciences and chemical analysis, are not particularly sensitive to economic trends and grew sales at least 21% in fiscal 2011. Electronic measurement, which accounts for about half of Agilent's revenue, sells to cyclical technology and industrial end markets. But given the U.S. economy's recent improvement and the strong growth in businesses' spending on equipment, the 2012 profit estimate seems conservative.

In the wake of the stock-price weakness, Agilent looks unduly cheap at just 11 times trailing earnings, 23% below its peer group and 55% below the three-year average P/E ratio. Agilent generates 65% of its revenue outside the U.S., including 40% from the high-growth Asia-Pacific region. Agilent is a Focus List Buy and a Long-Term Buy.


Apple ($389; AAPL) long ago grew out of its underdog role, and its shares now carry the discount of an aging tech giant with slowing growth. Some suspect Apple's pace of innovation cannot hold, and its run of blockbuster products must eventually end. But the company's expansion into new markets should help sustain operating momentum. First, while it grabs share in the high-end smartphone market, Apple continues targeting other parts of the market, selling older iPhones at cheaper prices. Second, large companies are beginning to adopt Apple products. Users include retail staff who rely on iPads to check inventory and airline pilots who consult navigation charts.

Moreover, Apple continues to improve the integration of its products, allowing customers to easily juggle files between devices and buy music, videos, and applications from its online stores. Apple hopes that a shopper who buys an iPhone becomes invested in that ecosystem and will be more inclined to purchase a Mac or iPad over a Windows-based personal computer. This trend is already starting to materialize. Including the iPad, Apple's share of the personal computer market has climbed to 15%, up from 9% a year ago, putting it in a position to displace Hewlett-Packard (18% share) at the top in 2012.

Shares trade at just 11 times projected earnings for fiscal 2012 ending September, which call for 26% growth. If Apple merely meets the consensus and the trailing P/E holds at its current level, 14, then shares will reach $490 by next fall. Scoring above 70 in all six Quadrix categories, Apple is a Focus List Buy and a Long-Term Buy.


DirecTV ($46; DTV) shares, up 15% this year, have doubled in price since the end of 2008. Yet the stock still can't keep pace with the satellite-TV company's operating momentum. Earnings per share are projected to grow 30% to $4.38 in 2012 on top of an expected 35% gain this year — and estimates are rising. For all that growth, shares trade at less than 11 times the 2012 estimate, 8% below the median cable and satellite stock in the S&P 1500 index. DirecTV's price/earnings-to-growth rate (P/E on current-year earnings divided by estimated five-year profit growth) of 0.6 is well below the industry median of 0.9.

Last month, DirecTV raised its 2011 revenue guidance for the Latin American business, now expected to surge 40%. With penetration rates for pay-TV still fairly low across most of Latin America, DirecTV courts the region's emerging middle class, a segment that seems to aspire for premium television as it does for new cars and homes.

Not even the U.S. pay-TV industry's decelerating growth and rising operating costs have zapped DirecTV's momentum. True, promotional activity has cut into profit margins this year, but DirecTV still produced $1.30 billion of free cash flow in the first nine months of 2011. Free cash flow could jump in 2012 as DirecTV trims spending on overhead, hiring, and programming. As of early November, $1.5 billion remained under DirecTV's share-repurchase plan, enough to buy back about 4.4% of outstanding shares at current prices. DirecTV is a Focus List Buy and a Long-Term Buy.


Larry Page, Google's ($626; GOOG) reticent co-founder, took over as CEO in April. The track record for founders taking up managerial reins is spotty in the technology sector. After Steve Jobs returned to Apple in 1997, he rebuilt it into one of the most valuable U.S. companies. But Jerry Wang became CEO at Yahoo in 2007, and the company has yet to recover. So far, the transition has been positive for Google, with operating cash flow surging 50% to $7.47 billion in the six months ended September.

Headlines in the financial press tend to focus on Android, Google's popular mobile operating system that powered nearly 53% of the world's smartphones sold in the September quarter. But advertising accounts for 96% of the company's revenue. Some advertisers pay Google a fee each time a user clicks on an ad displayed alongside a search, while others pay for simply having their ads displayed on Web sites owned by or partnered with Google. Nearly two-thirds of online searches in the U.S. use Google.

At a glance, shares don't appear cheap at 18 times trailing earnings. But Google's P/E lingers near the lowest point in company history — and is just 14 if you exclude net cash of $117 per share. If the P/E holds at 18 and Google meets the 2012 consensus per-share-profit estimate of $43.90, the shares will advance 24% by early 2013. Wall Street envisions 19% higher earnings per share next year on 23% revenue growth, and estimates are rising. Google is a Focus List Buy and a Long-Term Buy.

FOCUS LIST
Our Focus List contains no consumer staples, financial, telecom, or utility stocks. Six of the 13 stocks hail from the tech sector, reflecting the stocks individual appeal, not a broad endorsement of the sector.
12-Month Growth
Quadrix Scores *
Company (Price; Ticker)
Div.
($)
Yield
(%)
Trailing
P/E Ratio
Sales
(%)
EPS
(%)
Oper.
Cash
Flow
(%)
Days On
Focus
List
Price
Change
On Focus
List
Momen-
tum
Value
Quality
Overall
Sector
AGCO ($43; AGCO)
0.00
0.0
11
28
112
36
33
(5)
97
89
83
99
Industrials
Agilent Technologies
($33; A)
0.00
0.0
11
21
48
75
341
(20)
81
83
89
96
Health Care
Alliance Data Sys.
($102; ADS)
0.00
0.0
14
19
52
30
201
11
74
57
93
92
Technology
Apple ($389; AAPL)
0.00
0.0
14
66
83
102
460
48
99
77
100
100
Technology
Bed Bath & Beyond
($61; BBBY)
0.00
0.0
17
10
32
17
138
6
87
41
91
92
Cons. Discret.
CF Industries
($135; CF)
1.60
1.2
7
74
206
238
89
(23)
99
95
100
100
Materials
Chevron ($104; CVX)
3.24
3.1
8
24
60
34
33
(2)
86
86
80
99
Energy
DirecTV ($46; DTV)
0.00
0.0
14
12
47
(1)
1,160
129
88
73
98
99
Cons. Discret.
Exxon Mobil
($81; XOM)
1.88
2.3
10
28
46
31
320
1
78
83
75
95
Energy
Google
($626; GOOG)
0.00
0.0
18
30
25
38
33
5
92
45
98
97
Technology
Intel ($24; INTC)
0.84
3.6
10
21
19
37
82
9
90
78
92
98
Technology
MasterCard
($369; MA)
0.60
0.2
21
19
36
96
250
39
94
28
99
93
Technology
Oracle ($31; ORCL)
0.24
0.8
14
25
33
46
250
(9)
84
61
97
97
Technology
Focus List Average
0.9
13
29
62
60
261
15
88
69
92
97
* Quadrix scores are percentile ranks, with 100 the best.

 


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com